I think we are talking past each other here. Personal satisfaction in a trade of two things that previously existed and were traded in their orginial form is not an increase in wealth.
Why doesn’t it? Let say 20 different guys each traded a thousand pigs for an apple. Wouldn’t that imply something about the value of an apple?
You appear to be arguing there’s some kind of intrinsic value to things, independent of how individuals value them. Correct me if I’m wrong, but that’s contrary to modern economic thought.
We agree. One person acting in isolation does not set the price for something. If a bunch of people are exchanging at the same rate then, yes, it does imply something about the value of an apple.
No one person sets the price for anything, but every individual person influences the price. If there’s one person buying one apple for a ludicrous price, then he’s raised the price of apples in general by a small amount. If there are many people buying many apples for a ludicrous price, then they’re raising the price of apples by a larger amount.
To put it as simply as I can: There is no such thing as the “true value” of an asset. There is only seven billion different “this is worth X to me”'s running around. It is a pernicious mind-worm that things have a “true value”.
The closest possible proxy for a “true value” of something (at least those things that are traded on liquid markets) is the market price of something, but that is just an aggregate of the personal asset values of the market participants. Nearly all market participants value the asset more or less than the market price, otherwise no trading would ever occur.
To the contrary, the main point is that it does.
Agreed. If you are arguing this point then you are arguing with yourself.
No. Wealth is transferred but not created. No gain or loss for the nation.
I imagine you think that if I take a bunch of glass, steel, plastic, and rubber and rearrange those materials to make a motor vehicle, then you believe that wealth is created.
But all I’ve done is rearrange pre-existing atoms. The material goods were already there, a gift of the universe, conservation of mass and all that. All I did was change their shape into a form that people value more highly. The rearrangement of matter into more highly pleasing forms seems exactly like what we mean when we talk about the creation of wealth. It’s a gruff materialist description, but it’s also literally correct.
Likewise, transferring a pig from over here to over there is just a rearrangement of pre-existing atoms into a new form that pleases two people. “Ownership” of land is more abstract, but there will inevitably be material consequences, new decisions about the rearrangement of atoms of soil, that follow from a change in ownership. The new formation of the atoms, in their different places, is more highly valued than the old formation. That’s why they made the trade. In a very real sense, all creation of “wealth” is fundamentally nothing more than moving around what’s already there.
Then do you repudiate:
[QUOTE=yorick73]
Of course something can be worth more to one individual than to another on a personal level. That does nothing to change the true value of it though.
[/QUOTE]
? Because you do seem to be implying the existence of “true value” there.
Then I ask again, why did they trade? You seem to gloss over the increase in wealth in the transaction by calling it “personal satisfaction”, but even if that was the only reason people trade, it is still a form of wealth. Both parties wanted something, and now they have it, and without giving up as much as they got. Their deep, inner mental motivations in doing so are the province of psychology, not economics.
Or are you positing a “for the nation” wealth that is different from the aggregate of the wealth of its citizens?
I’m not really even sure what you mean here.
There is no “the” price. There is a price to which two parties mutually agree. Maybe the pig won a few spelling bees.
There is also “value”, but the value of some quantity is pretty nebulous and, at best, only correlated with price and not in lockstep with it.
You seem to use price and value interchangeably. Sony and Microsoft sell their consoles at a loss. Clearly, the “price” is different from “value” in their books.
First of all, the first quote you are attributing to me I did not write, please edit your post. And why all the snarkiness anyway? If you do not have any formal education in economics whatsoever why are you arguing your points so vehemently? If you want Jigger to go on believing what you say that’s cool; but your insistance on speaking with such absolute certainty about a topic you have no formal education in isn’t exactly fighting ignorance.
You have taken the resource of land and applied the resource labor, and produced a good that has value. That is the basic economic equation. This is how wealth is created, as opposed to shifting things around between individuals through a medium of exchange.
The market determines the price; if the market consists of one buyer and one seller, then the price is what the buyer and seller agree to. If there is a market that has many buyers and many sellers who have many options for buying and selling then the price is determined by an equilibrium where the supply curve and the demand curve intersect and no single individual has the power to move prices - there’s a few other market situations I won’t go into now; just wanted to clear that up before it got out of hand.
It’s worth pointing out that there’s a risk with any investment. It doesn’t matter if you loan money to your brother-in-law or buy Microsoft stock - there’s always a chance your money will be lost.
But as a matter of historical fact, the least risky thing you can do with your money is give it to the United States government. It has a credit history going back over two hundred years with a zero default rate.
The “basic economic equation” you’re referring to is the production function.
You chose land and labor, which is slightly strange. Generally, a two-input function uses labor and capital. When a third input is added, it’s most often total factor productivity. The Solow Growth Model is the classic example of this. You made a different choice, and that’s fine, but that illustrates the arbitrary nature of the function. We’re dealing with mathematical description whose purpose is to clarify our thinking. It’s not intended to perfectly mirror the real world. Already we approach the heady realms of abstraction – what the hell is total factor productivity anyway? – but we can get even more mathematical. The Cobb-Douglas production function given in a popular grad textbook (Microeconomic Analysis) is a two-input production function, and the book doesn’t even bother to list the two inputs in its introduction. The inputs are merely z[sub]1[/sub] and z[sub]2[/sub]. No labor or capital or land or nothin. It’s just variables.
It’s an abstraction. You’re taking an equation which is used as a generalized mathematical tool and treating it like it’s literally real. It isn’t. What’s real are atoms.
If you want to limit your conception of the creation of wealth to a deliberately abstracted formula that’s used to simplify analysis, then that’s your choice. But the moment you do that, you’ve left reality and entered the world of model-building. That’s fine on its own terms. Model-building is fun, and it can occasionally even be insightful. But it’s not real in the way that physical matter is real. Your economic equation was created to be useful, but it’s supposed to be used as a description of reality under certain conditions, not as a replacement for reality.
You can, if you wish, strictly limit your definition of wealth to notions that fit the equation. But I’m telling you right now, there is no rational basis for doing that. What is “labor”? In the equation, it’s abstracted man-hours of work, one just as equally good as the other. Does that fit any reality you’ve ever seen? Are all hours of labor equally valuable with the other, regardless of the person or the time of day? It’s even worse with “capital”. At least all human beings are the same species, but different kinds of machines can hardly be said to belong to the same kingdom. Yet they’re all entered into the equation under the K, smooshed in to fit the rigid demands of simple modeling techniques. There was a huge dispute in economics about how fair it actually is to treat units of capital as homogeneous. The entire argument was just this: how legitimate is it to use the abstract production function, with only a number entry for capital, to describe all the different possible forms of atoms out there in the real world that make up capital equipment?
I like the “basic economic equation”. I think many forms of it are useful. But you’re making a mistake if you think that that equation is the only possible thing that determines what wealth is in this world. The real world isn’t capital, labor, land, entrepreneurial talent, total factor productivity, or any of that.
The real world is the constant rearrangement of atoms. Building a car is rearranging atoms, and so is moving a pig from one farm to another. The fact that one easily fits into an arbitrary equation, and the other doesn’t, is not a reflection on reality. It’s a reflection on the equation. Aggregate statistics like GDP exist in order to help us understand, but they have inherent limits that we should accept. GDP is intended to be the total amount of final goods and services, and pig transfer doesn’t count. There are fairly good reasons for this (the pig is a finished good, so to speak), but those reasons are ultimately based in modeling convenience. We could easily have a different definition of GDP, just as the equation of exchange was originally written by Fisher using all transactions – including pig transfer. It was only later that MV=PT was replaced with MV=PY, with transactions replaced by the national income. You can see the element of arbitrariness to all of this, because there are countless possible languages we can use to describe the one reality.
Economics is supposed to be helpful in providing a new language to describe certain things more clearly. It’s not a tool to bludgeon others who happen to be speaking plain literal truth in a way that we were previously unaccustomed to hearing.
Maybe I’m slightly strange. You can use land and labor, land and labor capitol, whatever factors of production apply to the situation. I should not have said the basic economic equation, I should have said a basic economic equation. I think you are using land to mean something different than what I mean it to mean. But the point I was making was that you were saying wealth was not created in your situation I was saying that it was.
Probably this whole conversation is getting way over my head.
I was saying that wealth was created in that situation. Moving atoms into more pleasing arrangements (like building a car) creates wealth.
And the same reasoning applies when a pig is transferred to a new owner. That’s a rearrangement of atoms that pleases both participants. Pig transfer isn’t included in GDP (for good reason*), but the action can still be seen as creating wealth in a very real sense, same as building a new car.
*There would be major problems with including the transfer of “already existing” assets in GDP. A couple of the most basic issues is that it would be way too hard to measure and way too easy to manipulate. Secondary trades don’t tend to happen at predictable places, so the data is harder to collect, and anyway, even if they were counted, anybody could transfer ownership back and forth, racking up GDP points for its own sake rather than having the transfer itself be meaningful. A deeper problem is that a simple trade, although it might greatly benefit both parties, isn’t necessarily difficult to accomplish, and so there’s not much “effort” involved compared to the price. This skews our measurement of the value that was created by the trade, compared to the more easily measured effort involved in creating new goods and services.
I don’t agree that it is the same reasoning. but its my bedtime.
By “true value” I was referring to the very thing you described so well…not an absolute cosmic constant.
For the nation as a whole there has been no increase in wealth. I’m no economist but unless I’m missing something very basic, just the act of trading two things that already exist is nothing more than transferring ownership. If the land is developed or the pig is turned into bacon then wealth is created. Short of that you’ve just swapped owners and the nation does not benefit one bit.
Even on a personal level I can’t see how either party of a trade gains wealth. Both are trading something they have for something they want more. Presumably they both agree that what they are trading is the equivalent value of what they are receiving or they wouldn’t be making the trade (i.e. a guy trying to sell land for a billion dollars would not accept a pig worth considerably less if he thought he could receive many more pigs for the trade). If things of equal value are traded then no wealth has been created…merely transferred. If something of no value is turned into something of value and then traded, then the producer of the good has gained wealth.
If there is an imbalance in the trade (for example accepting one pig for something worth a billion dollars) there is still no wealth created. The guy with the pig gains wealth and the guy with the land loses wealth. Transfer of wealth.
That’s why it always surprised me that gold is so often held up as the ideal investment. It’s probably one of the most difficult commodities to make any improvements to. Okay, if you have the skills, you can make jewelry out of it. But other than that what can you do with gold to make it more valuable?
Compare gold to a pig. You can take a pig out into the woods and let him forage and he’ll end up as a bigger pig. You can introduce your pig to another pig of the appropriate gender and produce piglets. You could teach your pig to do tricks and sell tickets to people to watch it perform. And, of course, you can turn your pig into pork. There’s lot of ways you can improve a pig and increase its value.
In contrast, pretty much all you can do with gold is buy it, stare at it, and hope that at some point in the future somebody else will want to buy it from you for more than you paid for it.
So true…and yet…there it is. (Well; not an ideal investment but nevertheless held up as a solid investment over time.)
Over nearly every other representative (not to mention fiat) currency, it’s withstood a test of time. Entire new worlds have been sloshed around in by people looking for it at their own peril because demand back home was so high, and it turns out the new worlds valued it also. When Pizarro snagged Atahualpa, he was able to cough up an entire storeroom of gold objects b/c gold held some sort of basic fascination for the Incas in a parallel way–enough to make it the pinnacle material for their religious ceremonies. I’m amazed at that. Two completely separated continents, and both put gold at the top of the admiration chain.
I find the obsession with gold remarkable, and I can’t quite figure out if it’s something deeply atavistic, or simply a cool looking metal that doesn’t need a lot of processing to make it into something pretty.
Whatever drives it, it’s a very good bet long term that at some point in the future someone else will want to buy it from you for more than you paid for it. At least, over long enough periods (lifetimes of nations), it’s held its value over every fiat currency I can think of.
If we get to a Mad Max scenario, plenty of people will starve and kill for gold. Amazing.
I just wish I could predict the short term better. Given our over borrowing, and the loss of faith in fiat currency, I’ll say it’s going higher next five years. Right now I’ve sold off most of my holdings, but I’m thinking its time to buy again.