# 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:** 5
**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, 4:29pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/81 "2002-12-07T16:29:18Z")
Or you could get back to the subject later, Lib. That’d be better. Slightly irritated tone notwithstanding, it wasn’t meant as slam, just as a heads up. ---
**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, 4:42pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/82 "2002-12-07T16:42:34Z")
Well, don’t misunderstand me, Hawthorne. I took no offense. I understand that academic disciplines routinely appropriate for their own use ordinary terms, or ordinary sounding terms, for the purpose of facilitating clarity of discourse. Thus, people are sursprised to learn that, in logic, a “truth bearer” is not a person, but a proposition. Or that a “weak axiom” is not inferior — in fact, it is the opposite. What I have read of macroeconomics, I have read mostly from extremely biased sources, and am therefore more than willing to defer to your substantial general expertise on the matter. I do recognize you as an authority. But I don’t want you to think that I will cease opining about economics that purports to analyze large scale economies to devine prognostications and objective conclusions based on the fuzziest, skimpiest, and most misleading possible subjective data. When I can find whatever is the current term for that — for what Maeglin described as a system that cannot falsify its theories — I will use the term. Meanwhile, I’ll just call it voodoo. 😉 ---
**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 7, 2002, 5:10pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/83 "2002-12-07T17:10:45Z")
> [@](#): > > \*Originally posted by Libertarian \* > **All I know is [economics’] basic underlying theory and axioms…** So have you read Varian’s _Microeconomic Analysis_ or Mas-Colell, et. al.'s _Microeconomic Theory_? I’ll take your word for it if you have. If you haven’t, or read something on par with those, then basically what you’ve learned are what Ian Stewart & Jack Cohen call Lies To Children–which doesn’t really qualify one to make epistemological judgements about economic theory. > [@](#): > > **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.)** You may enjoy reading pages 61-69 of _Fashionable Nonsense: Postmodern Intellectuals’ Abuse of Science_ by Sokal & Bricmont. Falsifiability is an important criterion, but not the only criterion for effectively understanding the world. Indeed, scientists spend most of their time confirming rather than falsifying. And using falsifiability in a naive and literal sense is going to do nobody any good. Economics is a complicated discourse, just because theory doesn’t jibe with data _on the face of it_, doesn’t mean it should be thrown away; there are alot of issues to be worked out and separated–and that is a delicate and difficult process–before judgement can be rendered. That doesn’t make it bunk, it makes it hard. Not to mention the fact that experimental economics is engaged in addressing the empirical testing of basic assumptions. From every economist I’ve talked to, rationality, for example, is a pretty good approximation. And for studying something as complex as human behavior, well, that’s a bit of a coup, isn’t it? ---
**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, 5:39pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/84 "2002-12-07T17:39:46Z")
[Mr Burns]Excellent[/MrB] > [@](#): > > _Libertarian, somewher on page one_ > there are too many kinds of property that make the economy an open (as opposed to a closed) system This is, I think, the interesting question. What neoclassical theory purports to show is that - under certain special conditions which get rid of lots of otherwise interesting questions for the purpose of focussing on a particular one - competitive markets reach a situation where it it is not possible for one person to be better off without someone being worse off [“the first fundamental theorem of welfare economics”]. It seems to me that in outcome if not entirely in spirit this is the same as the general vibe of Austrian thought. Further it shows that whilst output per head can grow from an initial situation due to capital accumulation, [bowdlerised Austrian version: over time, the economy becomes more roundabout] that output per head [valued as always by the subjective preferences of individuals] reaches a maximum after a while [the Solow/ Swan result I mentioned above]. Sustained growth has to be due to something else, something inexhaustible. Or it could be that the last century’s growth is about to come to an end. Endogenous and increasing returns technology? Continued economies of specialisation? I dunno, but I don’t think > [@](#): > > there are too many kinds of property that make the economy an open (as opposed to a closed) system is any kind of answer. ---
**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, 5:45pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/85 "2002-12-07T17:45:22Z")
Answer to what? ---
**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, 5:55pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/86 "2002-12-07T17:55:26Z")
Africanus wrote: > [@](#): > > So have you read Varian’s Microeconomic Analysis or Mas-Colell, et. al.'s Microeconomic Theory? I’ll take your word for it if you have. If you haven’t, or read something on par with those, then basically what you’ve learned are what Ian Stewart & Jack Cohen call Lies To Children–which doesn’t really qualify one to make epistemological judgements about economic theory. I’ve already spoken to that. See if you can find it. > [@](#): > > Falsifiability is an important criterion, but not the only criterion for effectively understanding the world. I did not _say_ that it is the only criterion, merely that it is a necessary one. > [@](#): > > And using falsifiability in a naive and literal sense is going to do nobody any good. I suggest that you back up your assertion that I am using falsifiability in a naive sense, or else admit to your error. > [@](#): > > Economics is a complicated discourse, just because theory doesn’t jibe with data on the face of it, doesn’t mean it should be thrown away; there are alot of issues to be worked out and separated–and that is a delicate and difficult process–before judgement can be rendered. It has been shown deductively that voodoo economic theory is a priori fallacious. You must find an error either in a premise or inference in order to contradict the conclusion. > [@](#): > > That doesn’t make it bunk, it makes it hard. I know an ad hoc when I see one. Economics is no “harder” than human psychology. > [@](#): > > Not to mention the fact that experimental economics is engaged in addressing the empirical testing of basic assumptions. Please enumerate the assumptions and describe the tests. > [@](#): > > And for studying something as complex as human behavior, well, that’s a bit of a coup, isn’t it? But unlike mac… er, voodoo, Mises didn’t attempt to study the whole of human behavior, but merely one atom of it. ---
**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 7, 2002, 7:46pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/87 "2002-12-07T19:46:20Z")
> [@](#): > > \*Originally posted by Libertarian \* > I’ve already spoken to that. See if you can find it. I’ll take that as a “no.” > [@](#): > > I suggest that you back up your assertion that I am using falsifiability in a naive sense, or else admit to your error…It has been shown deductively that voodoo economic theory is a priori fallacious. You must find an error either in a premise or inference in order to contradict the conclusion…I know an ad hoc when I see one. You just did it for me. > [@](#): > > It has been shown deductively that voodoo economic theory is a priori fallacious. You must find an error either in a premise or inference in order to contradict the conclusion. The only “voodoo economics” I’m familiar with is the Laffer curve. See _Ferris Bueller’s Day Off_. Neo-classical economics is _a priori_ fallacious? Do you mean _a priori_ as in “reasoning from cause to effects, i.e. deductively”, “without previous investigation”, or “not derived from sensory experience”? Seriously. Those are the three definitions given in my _Oxford Dictionary of Foreign Words & Phrases_. I tend to assume the second. Instead of assuming that neo-classical economics is “voodoo”, consider for example the axioms of rationality for an at-least-as-good-as preference relation. They are quite falsfiable. If people’s preference relations can be shown to be intransitive, then by all means the transitivity assumption has been falsified. Furthermore, since rationality is linked to choice through a series of “if and only if” statements, if people can be shown to choose irrationally, then at least one of the assumptions has been falsified. Fortunately it turns out that, not only for people, but also for rats & pigeons, these assumptions have been shown to be pretty good approximations. So not only are they falsifiable, they have been shown to be fairly well confirmed. > [@](#): > > I know an ad hoc when I see one. [Mr. Burns]_Excellent_[/Mr. B] Really, that’s good. In this case, I suspect you’ve seen one that isn’t. There is alot to be considered in, say, a macro model. Finding the appropriate proxies, whittling out irrelevant info, identifying confounding variable, _inter alia_. Not to metion the fact that we are dealing with _models_ which, by definition, are extremely pared down versions of reality. It’s tricky business. That’s not an _ad hoc_, it’s a fact of life–one that must be dealt with. > [@](#): > > Economics is no “harder” than human psychology. Actually, it is. It is quite a bit harder. I studied both. Except for neural psych. That’s a bitch–mostly because of the physiology (sp?) and chemistry needed before any significant inroads can be made. > [@](#): > > Please enumerate the assumptions and describe the tests. No. Seriously, no. The fact that you even have to ask is _prima facie_ evidence that you really aren’t prepared to discuss the epistomology of economics. Ditto for your remark that macroeconomics attempts to study the “whole of human behavior.” That doesn’t even warrant comment. Don’t get me wrong. I have great respect for you and your opinions. It’s just that I don’t see any real understanding of economics outside of the Austrian School.☹ ---
**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, 8:02pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/88 "2002-12-07T20:02:37Z")
Well, hell’s bells, that’s what I already said, isn’t it? 😃 But hey, if you don’t want to back up your assertions, no problem. Something that is not testable, refutable, or falsifiable is an art, not a science. Not that there’s anything wrong with art. ---
**Author:** ![jshore](https://avatars.discourse-cdn.com/v4/letter/j/b5e925/32.png) [@jshore](https://boards.straightdope.com/u/jshore)\ **Post date:** [December 7, 2002, 11:54pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/89 "2002-12-07T23:54:19Z")
> [@](#): > > \*Originally posted by Muad’Dib \* > The workers only make wealth in the most base sense. The businessman who brought every one together and devised the method by which to create, is the one primarily responsible for the wealth being made. [At the risk of beating a dead horse, I just had to weigh in on this.] Let me take a wild guess…you’re a businessman (or an apsiring one)? Well, I am a scientist working in a corporate research labs and I say that you wouldn’t do shit if you didn’t have me to figure out how to actually make the stuff you want to make! And, I am sure the factory workers down the road from me would remind me that this all wouldn’t come to shit if they didn’t actually make the damn stuff! After all, in the end, if you look at a company and how the total aggregate wages are distributed, you will see that (at least in all but the rather small ones) most of it is accruing to the worker bees and not the “businessmen”. Thus, even if you believe that everyone is paid according to their marginal product and all that oversimplified stuff, you arrive at the conclusion that most of the wealth must be being created by those folks. (Or, do you want to argue that the “marginal product” theory fails in that it vastly overestimates the marginal product of the worker bees relative to the businessman? I would certainly be fascinated in hearing how you back up such a claim!) ---
**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 8, 2002, 12:37am UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/90 "2002-12-08T00:37:23Z")
> [@](#): > > \*Originally posted by jshore \* > **[At the risk of beating a dead horse, I just had to weigh in on this.] Let me take a wild guess…you’re a businessman (or an apsiring one)? Well, I am a scientist working in a corporate research labs and I say that you wouldn’t do shit if you didn’t have me to figure out how to actually make the stuff you want to make! And, I am sure the factory workers down the road from me would remind me that this all wouldn’t come to shit if they didn’t actually make the damn stuff!** Beating a dead horse? I wouldn’t say so. But you do sound pretty pissed.🙂 ---
**Author:** ![jshore](https://avatars.discourse-cdn.com/v4/letter/j/b5e925/32.png) [@jshore](https://boards.straightdope.com/u/jshore)\ **Post date:** [December 8, 2002, 2:58am UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/91 "2002-12-08T02:58:42Z")
Well, I didn’t mean to sound pissed as much as to make the point that everyone tends to see themselves as the center of the universe and the other players as less important. (Hence, while presenting the argument as to why **I** the research scientist am the really important one ;), I also presented what I think would be the argument of those who actually do the manufacturing.) ---
**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 8, 2002, 3:48am UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/92 "2002-12-08T03:48:27Z")
> [@](#): > > \*Originally posted by jshore \* > \*\*Well, I didn’t mean to sound pissed as much as to make the point that everyone tends to see themselves as the center of the universe and the other players as less important. (Hence, while presenting the argument as to why **I** the research scientist am the really important one ;), I also presented what I think would be the argument of those who actually do the manufacturing.) \*\* Ah, sorry about the misunderstanding. :o (Why does the embarrased smiley look like the felatio smiley?) ---
**Author:** ![Liberal](https://avatars.discourse-cdn.com/v4/letter/l/848f3c/32.png) [@Liberal](https://boards.straightdope.com/u/Liberal)\ **Post date:** [December 8, 2002, 12:49pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/93 "2002-12-08T12:49:35Z")
Speaking of Freud… 😃 ---
**Author:** ![pantom](https://avatars.discourse-cdn.com/v4/letter/p/34f0e0/32.png) [@pantom](https://boards.straightdope.com/u/pantom)\ **Post date:** [December 8, 2002, 6:46pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/94 "2002-12-08T18:46:15Z")
How about a theory with some predictive power on the macro level? Years ago I read Jane Jacobs’ three books on cities, from which you could construct a city-based theory of wealth buildup on the societal level. Given that she said the main obstacle to the renaissance of cities was the large tax burden their residents were forced to shoulder, I figured back in the mid eighties that the Reagan tax cuts should accomplish three things, if she was right: 1 - a renaissance of NYC. 2 - a simultaneous long, persistent decline in commodity prices, resulting in 3 - a persistent declining trend in the population of rural areas. (places with less than 10000 people held 20% of the population in 1970 and 1980. In 1990 that declined to 18.4%, and in 2000 to 16.6%). All three took place. I figure that proves the theory for all practical purposes. If you want a quick look at what it’s all about, pick up _Cities and the Wealth of Nations_. The other books she’s written on more or less the same subject flesh it out a little more. ---
**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 8, 2002, 6:53pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/95 "2002-12-08T18:53:10Z")
> [@](#): > > \*Originally posted by Libertarian \* > \*\*Speaking of Freud… 😃 \*\* Touche, dear friend, touche.😉 ---
**Author:** ![SentientMeat](https://avatars.discourse-cdn.com/v4/letter/s/43a26b/32.png) [@SentientMeat](https://boards.straightdope.com/u/SentientMeat)\ **Post date:** [December 9, 2002, 11:03am UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/96 "2002-12-09T11:03:14Z")
Sorry to appear a little slow, but can have some illustratory numbers? According to the proponents of this praxis idea, what is your estimate (wild guess if necessary) of how much wealth is created per year (in the US, say)? I repeat, if this figure is massively different to other measures, however rough, of economic growth (eg. change in GDP) then I simply cannot understand how the phrase “creation from nothing” could be used to describe it. Secondly, let’s take three examples: the visionary inventor, the CEO and the lottery winner. In your opinion, what fraction of the personal fortune in each example \* did not exist, anywhere \* before the personal fortune was amassed? Again, if the \* entire \* fortune was created from nothing, then surely I am destroying wealth by going broke? One could not argue that my wealth is merely being redistributed, since by that reasoning these wealthy people are merely becoming so via redistribution also? Incidentally, I consider my taxes “value” (even though I’d like to see more of them spent on public services, in the same way that Mr Smith could conceive of a better pencil but still chooses to buy the one he does). ---
**Author:** ![Liberal](https://avatars.discourse-cdn.com/v4/letter/l/848f3c/32.png) [@Liberal](https://boards.straightdope.com/u/Liberal)\ **Post date:** [December 9, 2002, 12:10pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/97 "2002-12-09T12:10:19Z")
My wild guess would be $30 to $50 billion dollars. There is no problem with your considering your taxes “value”. There would also be value if a mugger robbed you and helped pay your utility bill after he pocketed a portion for himself. But it wouldn’t be a praxis. And it would generate no new wealth. ---
**Author:** ![hawthorne](https://avatars.discourse-cdn.com/v4/letter/h/c89c15/32.png) [@hawthorne](https://boards.straightdope.com/u/hawthorne)\ **Post date:** [December 9, 2002, 12:27pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/98 "2002-12-09T12:27:43Z")
> [@](#): > > ## [Me] I don’t think quote: > > ## there are too many kinds of property that make the economy an open (as opposed to a closed) system > > is any kind of answer. > [@](#): > > _Libertarian_ > Answer to what? Where continued wealth acculmuation might come from. I guess your position (which is what many Austrians and others believe) is effectively that there is an inexhausible externality to market activity: markets generate new technologies, allow new specialisations and the complex of production and consumption grows indefinitely. Now, as an article of faith I understand this, and I accept it as a possiblility. But as a scientific proposition (which is the standard you’ve set) I don’t get where it’s supposed to come from. No matter what happens to technology you won’t grow the world’s wheat crop in a flower pot. With fixed (or finite) natural resources why wouldn’t there be - sooner or later - a limit to wealth? I also agree with **jshore** about research scientists and the point lurking underneath it, that whilst government activity may be destructive or merely redistributive, it may also be wealth creating if it generates benefits in excess of costs. And under various conditions (eg joint consumption which is common for informational goods) tax finance may be the best (or only) way to generate the associated wealth. Of course, whilst this conclusion may be reached using only subjective individual valuations it would not pass the “praxis” test. But that’s why these things are called market failures. [In preview, noting Lib’s mugger: it is of course the locks - not what is stolen - that represent the costs of crime] ---
**Author:** ![Liberal](https://avatars.discourse-cdn.com/v4/letter/l/848f3c/32.png) [@Liberal](https://boards.straightdope.com/u/Liberal)\ **Post date:** [December 9, 2002, 2:35pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/99 "2002-12-09T14:35:35Z")
Hawthorne wrote: > [@](#): > > Where continued wealth acculmuation might come from. I guess your position (which is what many Austrians and others believe) is effectively that there is an inexhausible externality to market activity: markets generate new technologies, allow new specialisations and the complex of production and consumption grows indefinitely. Now, as an article of faith I understand this, and I accept it as a possiblility. But as a scientific proposition (which is the standard you’ve set) I don’t get where it’s supposed to come from. It is derived by reasoning from the general to the particular (deduction). As you basically point out, material things, like wheat, are not the only things that people value. New _ways_ of doing things, for example, have value, and are often worth more to people than X amount of money. Entertainment does, too. Specialized skills. Ideas. Services. Even thoughts, like poetry and art. People will even pay to have their fortunes told. So, we can reason from these generalities that value, per se, is generated among economic participants, and is realized upon the occurences of praxes. We can reason further that not all sources of value are exhaustible. Even if we run out of fossil fuels, for example, entrepreneurs will find value in alternatives and ideas for alternatives. The system is not closed to the introduction of new entities with value. It follows, then, that the only way to cease generating value is to cease human action. ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [December 9, 2002, 4:39pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/100 "2002-12-09T16:39:10Z")
**Lib** , I got the link to work today. Maybe my internet connection was screwy… it happens here sometimes. > [@](#): > > That’s a societal trend that is based on a Christian holy day. Anthropology would give you data just as useful or more so. But that wasn’t the point. The point was that _there is a clear trend in decision-making processes that affect the nation as a whole in an aggregate way_. Yes, perhaps anthropology _would_ give us good data. It could, for example, offer up cross-sections of the population that have a similar decision-making process they use when purchasing items. > [@](#): > > God help the store owner who needs an economist to tell him that that will happen. God help the man who denies there is anything one can say about the behavior because it is motivated by individual, subjective opinions. How you experience pain is entirely subjective. I certianly have no ability to feel what you feel. But, at that, I can form all sorts of hypothesis that say which circumstances will make you likely to report you are experiencing pain. Why, if the sensation of pain is entirely private and subjective, can I form an objective analysis of the matter? > [@](#): > > 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. Because, by definition, howevether they choose to farm is the best way. This is not very illuminating. > [@](#): > > Hell if I know [if your decisions are made, to some extent, on public influence]. Ask a macroeconomist. Well, you could do what they do and _ask me_. And the answer is yes: though it is up to me to decide whether or not I follow one brand of decision-making over another, in many ways my decision making process appeals to external factors which are freely available for anyone to study. This is a useful result, unless one defines it as useless from the outset. That wouldn’t be a universal description of a fact, though, but a question thoroughly begged. [Previous page](https://boards.straightdope.com/t/how-is-wealth-created/140539.md?page=4) [Next page](https://boards.straightdope.com/t/how-is-wealth-created/140539.md?page=6)