erm, that’s “extent of the market”, not "state of the market.
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.
The creation of wealth is no mystery, Chumpsky. The wealth of a country is basically defined by its aggregate goods and services. Wealth is created when new things are made faster than old things are used up.
So how does it happen? Basically, through increases in efficiency and quality by application of the human brain. Also, the division of labor. If I have to make all my own goods, I’ll be horribly inefficient at all of them. So I go to my neighbor and say, “Tell you what - you specialize in grain, and I’ll specialize in hogs. We can optimize our farms that way, and become better skilled at what we each do. Then we’ll trade grain for hogs, and we’ll each wind up with more than if we had never entered into this arrangement.”
By and by, someone realizes that he can build a machine that harvests grain, but he doesn’t have the skills or the resources to build one himself. So he goes around the neighborhood, recruiting people to help him build his harvester. They will agree only if the time they spend building it gets them more grain than if they spent that time just harvesting by hand. So bad ideas that are inefficient lose resources, and the good ones gain them.
Then someone realizes that they don’t need grain, but hogs. So why should they help with the harvester? But another guy needs the grain, and has a surplus of hogs. So they make a side deal - we’ll both help build the harvester, and in return you give me some of the extra grain for extra hogs.
Little by little, a market springs up. It becomes a pain in the ass to have to barter all these transactions, so the people set up an institution to hold IOUs between everyone, and issue currency to back them up. Now people don’t have to meet personally to exchange value. If I have excess hogs, I don’t have to personally find a person who has the grain I need AND needs my hogs. I can just use the marketplace to distribute the transactions.
BUt in the end, wealth is only created when someone invents a process or a thing that returns more value than it took to build it.
I think Chumpsky’s political agenda has again caused him to sidetrack. How this question requires an answer such as “the term free-market is a term of propaganda” and then segue into stumping for socialism, I haven’t a clue. Well, I guess our quota of drive-by leftist rhetoric has been filled for the morning.
My (extremely limited) understanding was that technical innovation was effectively the * only * factor in long term macroeconomic wealth creation, since entrepreneurship, efficiency and the like are merely ways of dividing * existing * wealth according to the Law of Diminishing Returns more quickly?If there had been no technical innovation from a point 100 years ago, the market would quickly have reached a point of equilibrium from which no new wealth could appear, only flow from one area to another?
No, the workers make things more than the sum of their parts. The businessman provides tools and an environment conducive to this.
At the bottom, wealth creation is always about labor. Capital can make labor more efficient, but without labor, it just sits there.
Or to put it another way. No one makes money in the stock market. They acquire money in the stock market. Money is made by the guy who actually creates things, (or transports them).
Sentient:
I think you’re basically correct. The (real) economy (ie total economic output) can only grow if the inputs are increased, or technology allows you to use those inputs more efficiently.
I remember studying this at university, and i seem to remember that the conclusion was that long term economic growth can only come from technical innovation. Capital growth can provide economic growth in the short term, but not in the long term.
I may be remembering this incorrectly though, any economists care to confirm or deny this?
People do make money in the stock market. You can argue that stock market speculators are making sure that the financial assets are correctly priced by buying or selling appropriately. Their reward for doing this is profit. While they don’t provide a concrete economic good or service they do provide something of value - correct pricing in the market. In theory anyway…
Well, sure traders are workers too, and Managing capital flows labor just like any other form of information worker.
To the extent that speculators are managing their own money, they add a sort of value, but one that is far less valuable than the money they extract from the market in return. (mostly because they acquire the money the other people loose making bad investment decisions).
No. No. And no.
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.
People do make money in the stock market. They make money buy investing in other companies. I buy 10% of a company for $1000000. That company is then able to use this new money to expand and create more wealth (open new stores, invest in research, etc.). Once this new wealth is made the company is worth more than I when I bought the stock, so my 10% would sell for more then the $1000000 I payed for it. Also, since I own 10% of the company, I am entitled to 10% of the profits. No one has to lose anything for profit to be made on the stock market.
Completely wrong.
Obviously they do. However, they do not create wealth.
No it is not, and yes they do.
Please give reasons for your statements.
I am a little surprise that no one has mentioned the utilization of energy. Well maybe aside from expanded resources. Still, if you know how to make aluminum and you’re completely surrounded by bauxite unless you are able to access some form of energy the bauxite won’t “do” anything.
Would it be fair to say that the use of energy coupled with efficiencies in that use create the materials that we then call “wealth”?
Well, he certainly likes to think so. But it just ain’t so. The creation of wealth is always about either creation or transportation. Businessmen do neither directly, it’s the people who work for them who do the actual creation of wealth.
First of all, you may not have meant this, but you seem to be saying that when you buy stock that money becomes capital for the company to use. But this is not true in the normal case. Unless you bought in an IPO, the money you pay for stock does not go to the company. It does them no good at all. Companies benefit from their stock price only if when they issue more stock in some direct or indirect fashion.
But to your main point: Just because you walk away with a 10% return doesn’t mean the you personally created that 10%. It’s clear that you acquired that 10%, but a whole bunch of other people helped to create it.
Keep the businessman, and the money in your equation, but subtract all of the workers and it’s pretty clear that there will be no return on investment. Because wealth creation is fundamentally about work. (incidently, these days the work could be machine labor rather than human labor, but it’s still always labor that adds value).
Anyone who has paid attention to the way businesses work will know that what people are paid is based in large part on their ability to negotiate and to how close they are to money flows, rather than on their actual value. So the notion that your 10% return was your fair gain from the wealth creation that you helped to enable is pretty much self delusion. It might be, but the chances are pretty good that it isn’t.
Yep, which is why engineers say
energy * time = work
Yes ** Grey ** (welcome BTW), that comes fairly clearly under “technical innovation”.
I’m still unsure as to how else wealth is actually “created” rather than merely “manipulated”. The builder/businessman example seemed to me to be simply another example of economic “ebb and flow”: The wealth might be created upon initial production, but when overproduction later led to the plant being closed, this wealth would be destroyed in equal measure. The only way the business would endure in the long term would be by technical innovation, not merely by different management practises or stockmarket wizardry.
Consider the example of a mafia boss.
Mr. Boss calls local business owners and tells them that he is collecting money for “protection”. He then orders his thugs to go out to the businesses and bring him half of the money.
After a week they got caught, and are all arrested (it is a pretty crappy mafia, but whada ya gonna do?).
When charging them with crimes, them mob boss will be sent away for a long, long time for racketeering, assault, the theft of lot’s o dough, and many other nasty crimes. But the thugs will get relatively light sentences because all they did was take the men’s money.
The mafia boss is responsible for all of the crimes committed and will be commensurably punished for it. The thugs are only responsible for the minor crimes that they committed.
The mafia boss is the one who set things in motion. The mafia boss is the one that planned out the crimes of all of the others. Without the mafia boss, none of this would have happened. He is the only irreplaceable cog in this machinery. Therefore he will be held responsible for that which he has created.
The same is true for a capitalist. It is the human mind that ultimately creates all wealth. It is a mind that you need to set things in motion and it is the mind that set things in motion that deserves the fruits of this labor. Better yet, do not think of it as deserving or not, but instead that the capitalist is being held responsible for what he has done.
Welcome to the boards Grey. Yes, energy is important. Natural resources, capital and labour are combined using technology to make stuff. This part of your post
also sheds some light on the discussion about the labour theory of value going on. To some people capital is “congealed labour” and the role of capitalists is to own and not to do. To others, capitalists and more importantly entreprenuers play an important role in organising production. In a way it depends on how you envisage the process of production - whether production is “merely” putting stuff together by combining factors of production using existing technology, or whether you think the process of producing stuff that people like requires a creative element. After all, we call it Michelangelo’s David - he created in a way that the owner of the quarry and the workers who built his chisels did not. How typical do you think this of productive processes in general?
I agree with Chumpsky that the term “free-market” carries ideological baggage, but I do recommend that he (and everyone else) read Hayek’s 1945 piece “The Use of Knowledge in Society” (Easy read, full text). Hayek certainly comes with a lot of baggage himself, but that is a great article.
But Muad’Dib’s question is about growth, not efficiency. There may be good bad systems involving high or low level of wealth, but the tricky question is where continuing growth comes from. If you look at Lib’s explanation of von Mises carefully, you’ll see that it seems to imply a level of wealth rather than an ongoing accumulation of wealth. This is a problem common to all sorts of economics. SentientMeat is quite right to say that the accumulation of capital won’t do it over the long term (as shown by Solow and Swan for the neoclassical school). Technological change is obviously important, but where does that come from? Is it produced in some way or is somehow external to the economic system? Is tech change limitless or will the process come to an end? Will poor countries “catch up”? We don’t know, but endogenous growth theory (led by people like Lucas, X Yang, Buchanan and Yoon, Krugman, Arrow, Romer etc) is trying to answer this question, but is a long way from converging (see here)
hmm, or the thugs get realy long sentences and the Boss gets a fine for tax evasion.
Capone only went in for tax evasion because that was all that the government could prove, not because they believed that it is all that he was responsible for.
This is a distinction without a difference. You can go through the exhaustive motions of trying to divide the world into “businessmen” and “workers” if you want, but the truth of the matter is that it doesn’t matter. If you have an organization of 1000 people who make widgets, the important question is how many widgets those 1,000 people can make and how efficiently they can do it.
It’s utterly pointless to try to allocate credit for the production of the widgets among the “workers” out of those 1,000 people, because it’s not an individual effort; it’s impossible at that level to separate the efforts of the individuals from the organization’s output. How many widgets does the janitor make? Well, the janitor personally might not make widgets, but he enhances the ability of others to make widgets by providing them with a clean, safe workplace where they won’t get sick or trip over garbage in the hallways. How many widgets does the Manager of Blue Widget Production make? He may not make them with his own hands, but like the janitor, he’s increasing the marginal output of others. How many widgets does the payroll clerk work? None directly, but do you think any widgets would get made if they stopped sending out paychecks?
Attempting to distinguish between “workers” and “businessmen” is outdated 19th-century thinking that largely results in arbitrary and stupid distinctions; is a barber who owns his own shop a worker or a businessman? In any organization larger than one person, EVERYONE is presumably contributing something to the organization’s output.
To answer the OP, wealth comes from human effort. Work. “Work” entails more than just our traditional “physical labor” definition, though; WORK is any effort a human puts into an individual or collective effort to turn inputs into more valuable outputs. All wealth ultimately derives from human effort - be it rivetting bolts, making business plans, practicing medicine, or mopping the floors.
Pretending that supporting functions like management, planning, accounting, and support services are not “Work” is stupidity of the most absurd and partisan sort. If you go into any manufactory on God’s earth and take out every single person who does management or support work, one of two things will happen; either the company will collapse in a matter of days, or some of the line workers will stop doing “labor” and will start doing the management and support functions. I cannot imagine how any intelligent person who has ever held a job could argue that only traditionally defined “labourers” do work. It’s nuts. I’ve done both, and I’m telling you straight up you need both to create wealth on a large scale.
I have paid quite a lot of attention to the way businesses work, and I see very little evidence that this is true. I’m sure you can cite Kenneth Lay as an example of someone who was apparently paid a lot more than he was worth, but the reality is that the vast, vast majority of people are basically paid what their labor is worth.