Kenneth Lay is not a counter-example. See what happened when he was payed more than what he was worth…
True but, on the whole, the big bosses, whether maffia or coorporations or governments, usually seem to get off more lightly then the actual purpatrators. At least that’s my impression.
(Exeptions being the Nazi’s and the Serbs, before someone brings those up)
Anyway, nothing to do with wealth.
Sorry for the interruption.
Cool!
Thanks Lib! (And this theory makes sense to me)
One other question: isn’t there at least one economic theory that claims “value” is objective? I’d think there would have to be, what with people talking about price and salary fixing. Hell, even the idea of a minimum wage implies an absolute “value” for work.
Can anyone recommend a book that compares a bunch of different economists?
Fenris
I like your mafia boss example Muad’Dib, but I don’t think your conclusion follows. If the opportunity for running a protection racket already existed, anyone could have been the boss. The boss is a rent seeker, not an entrepreneur.
Eh, not really. Even hard core labour theory of value people will admit that if nobody likes it, it’s not valuable. The dispute is about where the value comes from. And the second part of the quote doesn’t quite work - it’s one thing to suggest that value comes from the productivity of factors of production, it’s another to suppose that factors are actually paid their marginal product, and still another to suppose that this is a good thing. To take an extreme example, suppose some bloke who died many years ago was really responsible for 50% of today’s value and that he had one living beneficiary of his will, a depressed elephant. It is not clear that the elephant would get 50% of the world’s output, nor is it obvious that it should. But old notions of “just price” which were vanquished in the late 19th/ early 20th century still have a political hold on some people.
Thinking music on the books, I’m afraid. The history of economic thought is a pretty difficult topic for a layperson. And as for today, it’s hard to know what the disagreements are let alone what they mean. Mark Blaug is well known in this field, but I dunno whether he’d be readable.
Hmmm … back in college when I took that Introduction to Microeconomics course, we called this “consumer surplus”.
It looks like Mises’s book where he invented the word “praxis” was first published in 1949. Hmmm … I somehow doubt that no one thought of the concept of Consumer Surplus until 1949…
At last, our power is back on. (Ice storm.)
Hawthorne mentioned the importance of entrepreneurship to Austrian theory, and he is right. It is important. The reason it’s important is that an entrepreneur is a facilitator of praxes. Specifically, he facilitates choices that people can evaluate. Without the entrepreneur, there are no pencils for Mr. Jones to offer Mr. Smith.
Naturally, the nutshell that I gave cannot do justice to the entire 800+ page tome to which I linked. There are other considerations of the Austrian School as well, such as the Theory of Unintended Consequences, the Theory of Spontaneous Order (developed by Hayek, but conceived by Mises), and so on.
I do, however, take issue with Hawthorne’s assertion that Mises’ thesis (
did anyone else think “Reeces Pieces”?) deals with a level of wealth rather than an ongoing accumulation of wealth. Keep in mind that an economic praxis involves a change in the equilibrium of property, and Austrian theory defines property in the broadest possible terms.
Your mind, for example, is your property. If you therefore are able to produce an idea or concept that might interest an entrepreneur (or any buyer or seller), you may exchange your idea (itself your property) for any property, including money, hard goods, services (like labor), or other consideration. Thus, wealth is indeed created, maintained, and accumulated by economic praxes.
Amplify the Mr. Smith and Mr. Jones example to see what I mean. Mr. Smith is an entrepreneur who is seeking to supply $1 million in investment capital. Mr. Jones has an idea for a way to halve fuel consumption in automobiles. In a noncoercive free-market (and I will explain what that is), Mr. Jones owns his idea. So long as he can document ownership, he has no concern about Mr. Smith stealing it. (Theft, since it is involuntary for the victim, is not an economic praxis. A praxis must be both voluntary and volitional.)
So, Mr. Jones presents his idea to Mr. Smith, who in turn determines through research and due diligence that the idea is worth more to him than the $1 million dollars. He can turn the idea into a physical reality and make much more money than it would cost. He makes an offer to Mr. Jones.
Mr. Jones decides that the $1 million is worth more to him than ownership of the idea, and so he sells it. Since both men acted freely and willfully, there occured an economic praxis.
Mr. Jones has created $1 million dollars in new wealth for himself (more about that in a moment), and Mr. Smith projects that he can, in turn, create for himself $10 million dollars in new wealth, netting $9 million in wealth accumulation.
Now, about the “for himself” qualifiers… Austrian theory (at least, this brand) does not recognize any zero-sum pool of wealth. There are a couple of reasons for that: (1) the theory does not recognize any intrinsic validity in objective macroeconomic evaluations, only in subjective microeconomic evaluations; and (2), there are too many kinds of property that make the economy an open (as opposed to a closed) system — like the idea that Mr. Jones owned, for example.
I’d like to revisit the parenthetical that I attached to an entrepreneur as being either a buyer or a seller. In an economic praxis, there is no buyer/seller dichotomy. Each party is both buying and selling. When you go to the store, for example, you are used to thinking of yourself as the buyer and the store as the seller. But you are selling the store your capital, which it is buying from you with its goods and services. There need be no such distinction.
Labor is looked at the same way. The employer is buying your labor, and you are buying his cash, benefits, and perks. Or, you may say that the employer is selling his cash, benefits, and perks, while you are selling your labor.
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.
Finally, someone asked what a “noncoercive free-market is”. It is a market in which every individual is free from the initiated force or fraud of all other individuals. Thus, strict government regulation of coercion is required. According to Austrian theory, the more noncoercive a market is, the more robust it will be.
Fen
You asked for a book that covers most or all of the economics theories. There may be some, but they are likely highly technical, parochial, and at least biased toward one school or another. I have books on Keynesian, Chicagoan, and of course, Austrian. But only the Chicago book even mentions any other school.
If you don’t want to wade through Human Action (and it really is not a leasurely read), I recommend Economics for Real People: An Introduction to the Austrian School for learning Austrianism. From one review:
*Originally posted by Muad’Dib *
I don’t know about others, but wouldn’t one also need to consider the context in which wealth is being defined? That is,
don’t we (and economists) rely on “background information” (certain assumptions and tacit knowledge) based on a market economy in our definition and understanding of wealth, where it comes from, etc.?
Wouldn’t different societies in different times under different types of economic systems understand or define wealth differently? For example, someone living in a society based on a feudal or mercantilist economy, or in a hunter-gatherer society in which the giving-up or destruction of wealth (i. e. potlatch) is seen as an attractive ideal to achieve.
Libertarian,
Would Mises’s thesis apply equally well in feudal/mercantalist/hunter-gatherer socieities that have a different conceptualization of wealth, or does Mises actually outline the conditions (vis-a-vis a market economy) to which his conceptualization of wealth applies?
Wealth is created thusly,
Using a sharp stick I found I can spear five fish an hour. In one day I catch 40 fish in eight hours
A man comes by, he had an idea to make a net, but it will take him four hours. We agree to let me use the net to catch the fish for a 50/50 split of the take. With the net I catch 100 fish an hour. after my new friend makes his net I catch 400 fish in the remaining four hours. I get 200 fish, my new freind gets 200 fish and we are wealthier. Wealth is created generally by capital and technology combining to make labor efficinet in creating goods and services. Newer technology, more advanced thinking are what create wealth.
It’s created by :
-Accumulation of capital and investments : if you keep your money/capital until you can buy a machine, you’ll be then able to produce much more goods. Or at the most basic level, if you keep a little more seeds than needed instead of eating it, you’ll be able to grow a larger harvest next year. (the work/capital involved in the creation of anything produced by past generations…say an old house…is also part of this accumulation)
-Technological progress (and greater productivity). Obviously, you can produce much more books if you print them than if you hand-copy them.
Wealth can also be created artificially, of course (speculative bubbles). But this kind of wealth is only temporary, since it exists only as long as it stays potential (as soon as everybody actually sell his highly valued stocks/tulip bulbs, their value collapse, because this value wasn’t backed by anything real)
Well…and of course, wealth is also created by work : a tree hasn’t much value. Add the work of a lumberjack, and you get wood you can burn in your fireplace which has more vaue. Add the work of a cabinetmaker and you get a valuable piece of furniture.
Eponymous wrote:
His thesis applies only in the context of a noncoercive free-market. An economic praxis, by definition, cannot occur in a context of coercion. The actions of the parties must be both volitional (or willful) and voluntary (or made without coercion). Interestingly, Autstrian theories can apply to certain “black markets” within, say, a socialist economy.
Clairobscur wrote:
I disagree. Value is a highly subjective matter.
The Japanese Emporer, upon hearing that his palace had been bombed, asked about his trees. “The palace can be rebuilt in a few months,” he told his messenger, “but a tree takes a lifetime to build.”
A man might value a tree so highly that he will not think even a million dollars is worth more than his tree.
As difficult and unresolved as the initial OP question is, there still seems to be some unnecessary confusion regarding “creating one’s own wealth”.
Economic growth rates rarely exceed a couple of percent. If I understand this entire thread correctly, not even the most visionary inventor could amass a personal fortune of which any more than a small fraction could be said to have been “created from nothing”, as opposed to merely accumulated from somewhere else (industries his invention made obsolete, for example). Surely “making oneself wealthy” does not equate to “making wealth” full stop?
In your example, it does indeed. If the visionary inventor has invented something of value, say, a widget, each dollar he’s earned has provided someone else with a widget that they themselves value more than the dollar, as Libertarian and others have expounded on above.
If wealth equates to the amount of value possessed by an individual, or by individuals in aggregate, then new wealth has been created.
Surely, in that case, the amount of wealth created in a year which did not exist before far far outstrips the mere couple of percent of growth in the GDP? In that case, I don’t understand how it could be called “creation” in the true sense of the word?
I am not entirely sure I understand your objection. Are you saying that you don’t see how the increase of GDP is relatively small compared to the perceived increase of wealth?
If this is the substance of your objection, I believe it can be dealt with. Economic life is full of trade-offs. Every dollar you spend buying widgets has an opportunity cost. So simply buying a new invention does not inherently increase wealth, it just redistributes it. So today you have a widget instead of a gizmo. Each are worth $1. Net wealth is precisely the same, though today the inventor of the widget is vastly more wealthy.
In order for an invention to increase GDP, it must first increase productivity and then it must be disseminated sufficiently for many laborers to participate in its benefits. If personal computers were double their current prices and if there were half of them available today, the amount of currency transacted when computers are bought and sold would be the same, but the benefits of productivity would be drastically less, hence the increase in GDP would be slower.
While I agree with Lib’s presentation as a great basis for understanding wealth generation, I disagree that macro contexts are thus meaningless. Mises offers us a picture. It is a convincing picture that we are more or less affiliated with on an everyday level. But there is also a question of a series of wealth-building, rational, voluntary, individual choices that end up being bad for all parties involved (game theory offers up such examples). For this reason, a micro picutre which forbids any others is incomplete. We very often want the whole picture, or at least a bigger one, and an appeal to ultimate subjectivity in value estimation forbids such an analysis.
Thus is it necessary to have some criteria for evaluating aggregate effects, and as such we need an inter-subjective criterion, or a set of inter-subjective criteria, with which to make a bigger picture. This truly must be so, for businessmen and other employers in general cannot make decisions as if they were the only party involved without simultaneously violating the freedom of those he employs. The question of what these criteria are is thus of interest for macro contexts.
It does not help to explain aggregate effects to say that they are meaningless.
** Libertarian’s ** initial post stated that only an * atom * of wealth was created by each praxis, not an entire dollar. If all of these atoms add up to the couple of percent in GDP growth, I understand. My difficulty comes in concluding that an * entire * personal fortune constitutes an amount of money which did not exist beforehand, anywhere.
Incidentally, according to this praxis idea, if I go broke has wealth been destroyed?
Eris
For purposes of Austrian theory, whether a decision is good or bad is irrelevant so long as no force or fraud is initiated. If you buy a painting that is misrepresented as a Picasso when it is in fact a Nobody, there has been no praxis and no generation of wealth. In effect, your property has been stolen, and you are ethically entitled to get it back.
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.
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.
Most economics theories outside the Austrian School fits squarely into what Popper called “pseudo-science”. A Keynesian cannot pick up a newspaper without seeing “proof” that his theories are being validated by events. But so can his opponent, the Neo-liberalist.
SentientMeat
In the second example of Mr. Smith and Mr. Jones, it is still only an atom of wealth. It’s just that it is a uranium atom rather than a hydrogen one. 
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.
Lib, if I felt your five points were complete, I wouldn’t have just argued that logic was meaningless, but all language was. Consider those objections in that context.
- *there is too much data, *
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.
-
decisions that drive the data are subjective and arbitrary
Nevertheless, trends often develop in an inter-subjective context. -
the relations among those data are controversial and arbitrary
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.
- by the time the abridged data are analyzed, they are obsolete
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 exact same analysis can be interpreted differently by different people, depending on what their pet theories are
Re: (3).
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.