Where does wealth come from?
Discussion
As a sort of DIY adult education thing (mainly intended to prove to myself that socialism cannot work) I am trying to understand how wealth creation operates, and how it ties in to the economy as a whole. I found a definition which does not use long words or complex formulae:
"Wealth is created when assets are moved from lower to higher valued uses."
Just trying to understand what this means in practical terms for simple-minded people from Norfolk (i.e. me): I buy a second hand table for £20. I clean it up, give it a few coats of varnish (£10 cost for materials) and sell it for £50. In doing so I have moved the asset from a lower valued use (suitable for a student bedsit) to a higher valued one (suitable for the front cover of Homes & Gardens).
My wealth has increased by £20. The person I bought the table from has not lost out: he has exchanged an asset worth £20 for £20 cash. The person I sold it to has lost £50 cash, but gained an asset worth £50. So he is no worse off either. Net result is that the Government can print another nice crisp new £20 note without devaluing those already in circulation.
Am I understanding that correctly, and is there anything major I have missed?
"Wealth is created when assets are moved from lower to higher valued uses."
Just trying to understand what this means in practical terms for simple-minded people from Norfolk (i.e. me): I buy a second hand table for £20. I clean it up, give it a few coats of varnish (£10 cost for materials) and sell it for £50. In doing so I have moved the asset from a lower valued use (suitable for a student bedsit) to a higher valued one (suitable for the front cover of Homes & Gardens).
My wealth has increased by £20. The person I bought the table from has not lost out: he has exchanged an asset worth £20 for £20 cash. The person I sold it to has lost £50 cash, but gained an asset worth £50. So he is no worse off either. Net result is that the Government can print another nice crisp new £20 note without devaluing those already in circulation.
Am I understanding that correctly, and is there anything major I have missed?
230TE said:
My wealth has increased by £20. The person I bought the table from has not lost out: he has exchanged an asset worth £20 for £20 cash. The person I sold it to has lost £50 cash, but gained an asset worth £50. So he is no worse off either. Net result is that the Government can print another nice crisp new £20 note without devaluing those already in circulation.
Am I understanding that correctly, and is there anything major I have missed?
Only that the people you bought and sold from/to are better off as well. The person who sold you the table has exchanged an asset worth less than £20 to him, for £20.Am I understanding that correctly, and is there anything major I have missed?
230TE said:
As a sort of DIY adult education thing (mainly intended to prove to myself that socialism cannot work)
If you are trying to educate yourself, your objective should be to try to find out whether or not socialism works. If you have already decided it doesn't, there is absolutely no point bothering with this quest. And yes, I know my post will be followed by others saying it's obvious it doesn't work and calling me an idiot. The point I am making is one about education, not politics. Dr Jekyll said:
230TE said:
My wealth has increased by £20. The person I bought the table from has not lost out: he has exchanged an asset worth £20 for £20 cash. The person I sold it to has lost £50 cash, but gained an asset worth £50. So he is no worse off either. Net result is that the Government can print another nice crisp new £20 note without devaluing those already in circulation.
Am I understanding that correctly, and is there anything major I have missed?
Only that the people you bought and sold from/to are better off as well. The person who sold you the table has exchanged an asset worth less than £20 to him, for £20.Am I understanding that correctly, and is there anything major I have missed?
Randy Winkman said:
If you are trying to educate yourself, your objective should be to try to find out whether or not socialism works. If you have already decided it doesn't, there is absolutely no point bothering with this quest. And yes, I know my post will be followed by others saying it's obvious it doesn't work and calling me an idiot. The point I am making is one about education, not politics.
I guess I missed out a 
. But part of what I am trying to understand is why leftist governments always run out of (other people's) money. First step is to find out where the money comes from in the first place.230TE said:
First step is to find out where the money comes from in the first place.
Money is just a representation of work.We don't need to use it, we could directly exchange goods and services by, say, chopping wood in return for your morning coffee. But that would be a pain in the bum; you could not specialise in a trade easily, and never have a holiday.
Much more convenient to have a middle man. It could be anything, as long as it is valuable to each of us. Chickens are valuable, but you cannot get many in your pockets, they need food themselves, spending half a chicken is messy, and they look at you funny. For these and other reasons of inconvenience societies switched to rare metals and gems. But even carrying those around is not without risk, so we switched to trusted pieces of paper, IOUs with a value in gold. Eventually we decided we didn't need the gold and we have a fiat currency.
So, after lots of convenience-based decisions, it is still just a representation of work.
fesuvious said:
There is always the same amount of money on the earth
That can't be right, or I'd be able to buy a 3-bed semi for £100 just as I could have done in 1920. Clearly the amount of money in circulation has increased vastly, but does that represent an increase in global wealth, or just currency devaluation? And if, as you suggest, the global economy is a zero-sum game, does that mean that the £500 profit I made on an old Land Rover at the weekend will ultimately cause someone in Africa to starve to death?you create wealth by swapping something you have for something you value more. generally the person you do the swap with wants what you have more than what they have. everyone is better off. money just makes it easier cos denominating everything in chickens is fine until you only want a potato, or a gt3 rs. buy a musket in london, swap it for some poppys in kandahar, swap your opium for silks in hongkong, your silks in mumbai for spices and your spices in london for 10 muskets. didnt you ever play elite ?
fbrs said:
you create wealth by swapping something you have for something you value more. generally the person you do the swap with wants what you have more than what they have. everyone is better off. money just makes it easier cos denominating everything in chickens is fine until you only want a potato, or a gt3 rs. buy a musket in london, swap it for some poppys in kandahar, swap your opium for silks in hongkong, your silks in mumbai for spices and your spices in london for 10 muskets. didnt you ever play elite ?
In 21st century economics I find there are less Thargoids.cazzer said:
fbrs said:
you create wealth by swapping something you have for something you value more. generally the person you do the swap with wants what you have more than what they have. everyone is better off. money just makes it easier cos denominating everything in chickens is fine until you only want a potato, or a gt3 rs. buy a musket in london, swap it for some poppys in kandahar, swap your opium for silks in hongkong, your silks in mumbai for spices and your spices in london for 10 muskets. didnt you ever play elite ?
In 21st century economics I find there are less Thargoids.BarnatosGhost said:
Yertis said:
Digging it out of the ground in the first place.
This. And then judiciously apply labour to it.
The planet (& sun) supplies the material, we supply the effort.
However, does it explain how some others become wealthy?
The lawyer, the educator, the writer, the artist, the musician, the PR person and dare I say it, the politician?
The thing I would question about the reconditioned (or brand new vs used) table is that it is now a luxury item which has no more real value (although its percieved value is obviously higher) as a practical object than it did before.
I'm unsure of how value works with luxury goods. If I am a watchmaker and I repair a mechanical watch with my labour for a lower unit of value than it would take to purchase a new one, then I've created net worth for everyone. But if I charge £120 to service a high quality mechanical watch, have I really (in the most basic sense) added value when you can buy a more accurate (practical) quartz watch for £50?
In other words- what is the relationship between percieved value (a Patek Philippe is better than a Seiko quartz because it's finished to a higher degree and an object of beauty) and absolute value (The Seiko keeps better time and is thus of more value. Or the Patek improves my influence at work and is thus of more value).
I'm unsure of how value works with luxury goods. If I am a watchmaker and I repair a mechanical watch with my labour for a lower unit of value than it would take to purchase a new one, then I've created net worth for everyone. But if I charge £120 to service a high quality mechanical watch, have I really (in the most basic sense) added value when you can buy a more accurate (practical) quartz watch for £50?
In other words- what is the relationship between percieved value (a Patek Philippe is better than a Seiko quartz because it's finished to a higher degree and an object of beauty) and absolute value (The Seiko keeps better time and is thus of more value. Or the Patek improves my influence at work and is thus of more value).
Edited by glazbagun on Tuesday 8th June 03:31
WhoseGeneration said:
BarnatosGhost said:
Yertis said:
Digging it out of the ground in the first place.
This. And then judiciously apply labour to it.
The planet (& sun) supplies the material, we supply the effort.
However, does it explain how some others become wealthy?
The lawyer, the educator, the writer, the artist, the musician, the PR person and dare I say it, the politician?
So hiring a lawyer to defend you against the death penalty for walking on the grass, although obviously of value to you, is of no value to society if the law is stupid. As is paying a teacher to teach students pi to 3billion places. That doesn't mean that lawyers, etc add no value, it's just that the particular law/subject sold is of poor/no value.
Edited by glazbagun on Tuesday 8th June 03:41
I think your example sums it up pretty well 230TE.
The problem with socialism is this.
To extend the example a little, let's say you give your friend £5 to help you, then assuming you can get the table done quicker so can finish two in one day then you will create more wealth (assuming a limitless supply of tatty tables). Great.
Now, let's assume that you decide to buy a radio for your table workshop, you both chip in £5, have something to listen to while you're working. Great, a shared investment has improved both of your lives a little. So you decide to do something else. Let's hire a girl to make coffee for £5 a day. Now you are still only doing 2 tables a day, but your outgoings are £10, so your profit is reduced to £10 per 2 tables (1 day). Fine so long as you want coffee and don't mind the hit in your pocket.
Then let's say it's a democratic workshop, and the coffee girl and the table maker vote to hire a cleaner to keep the place clean, as they're busy and can't be bothered anyway. So you hire a cleaner for another £5 a day. Already your returns to entrepreneurialism have been reduced from £15 to £5 a day. None the less maybe you enjoy working with them, you're still making money so you decide to wear it. Now though, they all say that £5 a day is not enough, so they want an extra £1 a day each. Now your profit is reduced to £2. You're better off working for someone else.
You can substitute the cleaner and the coffee girl for anything you like in the public sector, and you can substitute the radio for schools, hospitals etc. It's an overhead that doesn't contribute to the total of wealth created.
Of course in a sense cleaners, coffee girls and perhaps even a radio do contribute to wealth creation in this instance by freeing up your time to polish tables. That's where the complicated equations come in, there's an optimal amount to spend on cleaning, coffee girls and radios somewhere and the challenge of an economist is to find out what that is. The point is though, that if you continually increase overheads and luxuries without proportionately increasing wealth creation then you end up removing the incentive and even the ability to create wealth.
I find with economic theory in general it usually helps to massively simplify, and most things can be explained by groups of cave men, fishermen in a boat or some other very simple example.
For inflation, prisoners make a good example. Let's say you have 4 prisoners sharing a cell. They each get 10 cigarettes, chocolate bar, and 1 hour of phone credit a day.
So, you can develop a trading system where 10 cigarettes = 1 chocolate bar = 1 hour of phone credit. If someone wants to spend 2 hours on the phone, they can buy an extra hour for one chocolate bar. If someone wants to eat 2 chocolate bars they can buy an extra one for 10 cigarettes, etc.
Now supposing the governor is feeling generous and decides to give them 20 cigarettes a day. What happens to the pricing system? Well there's still only 4 hours of phone credit, still only 4 chocolate bars, so all that will happen simply is that the price of these items will double in terms of cigarettes (ie cash in this example).
Now let's assume one prisoner has been frugal, stopped smoking for a week and saved up 70 cigarettes, thinking this will buy him 7 hours of phone credit. With the price of cigarettes essentially halved, suddenly 7 hours of phone credit costs 140 cigarettes. He only has enough for 3.5.
Of course if someone had been saving their phone credit and had 7 hours worth, this is now worth 140 cigarettes not 70, so he can smoke more. This would be analogous to buying gold and watching it's price in cash terms rocket up during a period of inflation.
The problem with socialism is this.
To extend the example a little, let's say you give your friend £5 to help you, then assuming you can get the table done quicker so can finish two in one day then you will create more wealth (assuming a limitless supply of tatty tables). Great.
Now, let's assume that you decide to buy a radio for your table workshop, you both chip in £5, have something to listen to while you're working. Great, a shared investment has improved both of your lives a little. So you decide to do something else. Let's hire a girl to make coffee for £5 a day. Now you are still only doing 2 tables a day, but your outgoings are £10, so your profit is reduced to £10 per 2 tables (1 day). Fine so long as you want coffee and don't mind the hit in your pocket.
Then let's say it's a democratic workshop, and the coffee girl and the table maker vote to hire a cleaner to keep the place clean, as they're busy and can't be bothered anyway. So you hire a cleaner for another £5 a day. Already your returns to entrepreneurialism have been reduced from £15 to £5 a day. None the less maybe you enjoy working with them, you're still making money so you decide to wear it. Now though, they all say that £5 a day is not enough, so they want an extra £1 a day each. Now your profit is reduced to £2. You're better off working for someone else.
You can substitute the cleaner and the coffee girl for anything you like in the public sector, and you can substitute the radio for schools, hospitals etc. It's an overhead that doesn't contribute to the total of wealth created.
Of course in a sense cleaners, coffee girls and perhaps even a radio do contribute to wealth creation in this instance by freeing up your time to polish tables. That's where the complicated equations come in, there's an optimal amount to spend on cleaning, coffee girls and radios somewhere and the challenge of an economist is to find out what that is. The point is though, that if you continually increase overheads and luxuries without proportionately increasing wealth creation then you end up removing the incentive and even the ability to create wealth.
I find with economic theory in general it usually helps to massively simplify, and most things can be explained by groups of cave men, fishermen in a boat or some other very simple example.
For inflation, prisoners make a good example. Let's say you have 4 prisoners sharing a cell. They each get 10 cigarettes, chocolate bar, and 1 hour of phone credit a day.
So, you can develop a trading system where 10 cigarettes = 1 chocolate bar = 1 hour of phone credit. If someone wants to spend 2 hours on the phone, they can buy an extra hour for one chocolate bar. If someone wants to eat 2 chocolate bars they can buy an extra one for 10 cigarettes, etc.
Now supposing the governor is feeling generous and decides to give them 20 cigarettes a day. What happens to the pricing system? Well there's still only 4 hours of phone credit, still only 4 chocolate bars, so all that will happen simply is that the price of these items will double in terms of cigarettes (ie cash in this example).
Now let's assume one prisoner has been frugal, stopped smoking for a week and saved up 70 cigarettes, thinking this will buy him 7 hours of phone credit. With the price of cigarettes essentially halved, suddenly 7 hours of phone credit costs 140 cigarettes. He only has enough for 3.5.
Of course if someone had been saving their phone credit and had 7 hours worth, this is now worth 140 cigarettes not 70, so he can smoke more. This would be analogous to buying gold and watching it's price in cash terms rocket up during a period of inflation.
glazbagun said:
The thing I would question about the reconditioned (or brand new vs used) table is that it is now a luxury item which has no more real value (although its percieved value is obviously higher) as a practical object than it did before.
I'm unsure of how value works with luxury goods. If I am a watchmaker and I repair a mechanical watch with my labour for a lower unit of value than it would take to purchase a new one, then I've created net worth for everyone. But if I charge £120 to service a high quality mechanical watch, have I really (in the most basic sense) added value when you can buy a more accurate (practical) quartz watch for £50?
In other words- what is the relationship between percieved value (a Patek Philippe is better than a Seiko quartz because it's finished to a higher degree and an object of beauty) and absolute value (The Seiko keeps better time and is thus of more value. Or the Patek improves my influence at work and is thus of more value).
I don't think there really is any measure of value beyond perceived value - as determined by what someone is prepared to pay for it. Arguably anything beyond food, water and basic shelter are luxuries. However they do contribute to wealth creation in terms of adding perceived value that someone is prepared to pay for. I'm unsure of how value works with luxury goods. If I am a watchmaker and I repair a mechanical watch with my labour for a lower unit of value than it would take to purchase a new one, then I've created net worth for everyone. But if I charge £120 to service a high quality mechanical watch, have I really (in the most basic sense) added value when you can buy a more accurate (practical) quartz watch for £50?
In other words- what is the relationship between percieved value (a Patek Philippe is better than a Seiko quartz because it's finished to a higher degree and an object of beauty) and absolute value (The Seiko keeps better time and is thus of more value. Or the Patek improves my influence at work and is thus of more value).
Further, it's possible to say that luxury good provide an incentive for wealth creation. Let's just say that your wage is £50 per day for mining coal, a Seiko costs £50 and the Patek costs £250. Let's further assume that you have the liberty to work as much or as little as you like.
On deciding that you want a new watch you have the choice of one day's work for the Seiko or 5 days work for the Patek. If you go for the Patek you mine 5 times as much coal as if you were to go for the Seiko, hence society is better off to the tune of 4 days worth of coal.
The Doctor or the Lawyer could be said to be a secondary wealth creator in the sense that he enables his patient or client to continnue creating wealth, in return for a slice of that wealth. But he could also be said to be a direct wealth creator in the sense that people will pay for their health or liberty as a welfare gain.
glazbagun said:
The thing I would question about the reconditioned (or brand new vs used) table is that it is now a luxury item which has no more real value (although its percieved value is obviously higher) as a practical object than it did before.
I'm unsure of how value works with luxury goods. If I am a watchmaker and I repair a mechanical watch with my labour for a lower unit of value than it would take to purchase a new one, then I've created net worth for everyone. But if I charge £120 to service a high quality mechanical watch, have I really (in the most basic sense) added value when you can buy a more accurate (practical) quartz watch for £50?
In other words- what is the relationship between percieved value (a Patek Philippe is better than a Seiko quartz because it's finished to a higher degree and an object of beauty) and absolute value (The Seiko keeps better time and is thus of more value. Or the Patek improves my influence at work and is thus of more value).
I reckon the answer to that one at least is fairly simple. An items (whether goods or services) is worth what someone is prepared to pay for it on the open market. It cannot be 'worth' anything else. This seems to be one area where leftists go horrible wrong trying to run a country. They decide that in the interests of 'fairness' items should cost something other than what people are prepared to pay for them. Most commonly they set the price below market value and the item disappears altogether. Cuba, Zimbabwe, the old Soviet Union or pretty much any other country run by Leftists will be rich in examples of this.I'm unsure of how value works with luxury goods. If I am a watchmaker and I repair a mechanical watch with my labour for a lower unit of value than it would take to purchase a new one, then I've created net worth for everyone. But if I charge £120 to service a high quality mechanical watch, have I really (in the most basic sense) added value when you can buy a more accurate (practical) quartz watch for £50?
In other words- what is the relationship between percieved value (a Patek Philippe is better than a Seiko quartz because it's finished to a higher degree and an object of beauty) and absolute value (The Seiko keeps better time and is thus of more value. Or the Patek improves my influence at work and is thus of more value).
Edited by glazbagun on Tuesday 8th June 03:31
WhoseGeneration said:
BarnatosGhost said:
Yertis said:
Digging it out of the ground in the first place.
This. And then judiciously apply labour to it.
The planet (& sun) supplies the material, we supply the effort.
However, does it explain how some others become wealthy?
The lawyer, the educator, the writer, the artist, the musician, the PR person and dare I say it, the politician?
I think there are some jobs that society deems necessary but which do not create wealth. Wealth needs to be measurable, tangible and transferable. Say you pay a professional joke writer to create a joke especially for you. You pay him £20, he tells you the joke and you laugh a lot. Great. You feel happy. But you are still £20 worse off than you were. (Unless you have the right to sell the joke on to others, in which case it is an asset worth whatever you can get for it.) You might be more productive as a result of your increased happiness, but that's a hard thing to measure. Wealth has not been created, merely transferred from you to the joke writer.
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