What Is Wealth? (For Droopy from Supply vs. Demand Thread)

[_Gadianton]

One of the most basic things you need to understand in Economics is that production is what really matters--when people toil to create something that wasn't there before, that is what causes the economy to grow; GDP is a measure of the production of useful goods and services actually being produced. Wealth is created when things that are produced are worth more than the cost of the inputs. If you can figure out how to make a cup of coffee for pennies and then sell it for dollars, you've figured out how to creat wealth.

So profit = wealth? I'm fine with that, I never remember "wealth" being much of a discussion in school, however. This is another problem having this discussion with Droopy: economic historians/philosophers will probably debate what "wealth" means, adding an additional layer of confusion to the subject of government intervention, which is ambiguous enough without specific consideration of the word "wealth". Market failures can be discussed without having an air-tight definition of "wealth".

I honestly don’t think Droopy has figured out how to think like that. He seems to think that wealth is about money, and that when free-market players willingly give money to each other, a magical alchemy-like process causes "wealth" (meaning new net wealth) to appear. But he thinks the alchemy doesn’t work if the government is somehow involved in the transaction.

Do you really think that's what he thinks? It sounds like that because he's so confused, but it's clear to me given the many citations he's provided over the years, that he misunderstands "crowding out" arguments against government stimulus.

I noted there are two main reasons people say government should build a bridge:

a) because market failures ensure private industry will not build bridges effectively
b) because building a bridge is a convenient example of fiscal stimulus dollars in action, which aim to stimulate demand.

Droopy's objections often come with references discussing (b) but never (a). Droopy's sources argue 1-for-1 crowding out, a dollar spent on a bridge is a dollar lost elsewhere. But that's only in context of (b), many libertarian economists will be perfectly fine accepting wealth creation if the context is (a). Droopy, in fact, accepts (a) also, -- but hold that thought.

Droopy doesn't know the jargon "crowding out", but he's got the main idea down. He knows if government spends a dollar of stimulus on a bridge, then that dollar is lost elsewhere. But he himself has argued, contra Friedman, that the government postal service is important. So how to reconcile? He refuses to understand there are two main arguments having little to do with each other lurking under the same question, so he interprets the answer to (b) in such a way that he can believe (a) with consistency. If it's logically impossible for government to create wealth (b), then when (a), it's actually not wealth creation, but facilitating wealth creation.

So I don't think the problem is that he thinks in terms of money instead of "wealth", you are trying to get him to start at the beginning of the textbook, but his views are shaped by what he's read as rejoinders to the back of the text that covers Keynes, and fiscal spending. I'm trying to act as a "bridge" between you two, to help Droopy understand that he needs to consider the various meanings of the words "government creates wealth" based on the contexts it arises in discussions, but thus far, I've failed.

Do you understand, Analytics, that the arguments he cites covering crowding out have nothing to do with the usual notion of making a profit?

I'm sure you do, but it doesn't seem to me you try to understand how his sources are affecting his arguments.

[_Analytics]

So profit = wealth?

Not exactly. “Wealth” is value. The creation of wealth is the creation of value. For example, Starbucks sold me a double-tall latte this afternoon for $41 Mexican pesos. The truth is, I would have paid $100 pesos for the latte—that is how much value I got out of it. Let’s say Starbucks could have sold it to me for as little as $30 pesos and still stayed in business. So how much wealth was created? I’d argue $70 pesos of wealth was created in the transaction—the $100 max I’d be willing to pay less the $30 minimum they’d be willing to sell it for. The price of $41 is how Starbucks and I negotiated to split the wealth—I got $59 of the wealth that was created, and they got $11.

In other words, if we drew a supply and demand curve, the area below the demand curve but above the supply curve for the quantities to the left of the market price is the wealth that’s created.

I'm fine with that, I never remember "wealth" being much of a discussion in school, however. This is another problem having this discussion with Droopy: economic historians/philosophers will probably debate what "wealth" means, adding an additional layer of confusion to the subject of government intervention, which is ambiguous enough without specific consideration of the word "wealth". Market failures can be discussed without having an air-tight definition of "wealth".

There can be some disagreement about what, specifically, “wealth” means and how it is measured (e.g. is clean water part of the nation’s wealth?). However, everybody should at least agree that has something to do with the worth of real assets, and that it is a stock and not a flow. In contrast, Droopy usually talks about wealth as a flow that is intrinsically linked to financial assets.

Do you really think that's what he thinks? It sounds like that because he's so confused, but it's clear to me given the many citations he's provided over the years, that he misunderstands "crowding out" arguments against government stimulus.

It’s hard to say what he really thinks—it isn’t clear.

So I don't think the problem is that he thinks in terms of money instead of "wealth", you are trying to get him to start at the beginning of the textbook, but his views are shaped by what he's read as rejoinders to the back of the text that covers Keynes, and fiscal spending. I'm trying to act as a "bridge" between you two, to help Droopy understand that he needs to consider the various meanings of the words "government creates wealth" based on the contexts it arises in discussions, but thus far, I've failed.

Do you understand, Analytics, that the arguments he cites covering crowding out have nothing to do with the usual notion of making a profit?

I'm sure you do, but it doesn't seem to me you try to understand how his sources are affecting his arguments. Look at it from the crowding-out perspective. A bridge can be cost-benefit justified in a localized sense, but crowding out could erase the benefit to the economy as a whole.

Reiterating the point, the ability of a business to make a profit is what proves it creates wealth. Starbucks could have given my coffee for free, and just as much wealth would have been created—they’d go out of business not because they failed to create wealth, but rather, because they failed to set the price in such a way that they were able to keep some of it for themselves.

Anyway, yea, I think I understand Droopy’s sources’ point about crowding out. Their point is that If the government didn’t tax me so much last year, I could have purchased a yacht, and that the yacht purchase would have stimulated the economy just as much as the economy was stimulated by my money being redistributed to poor people and then being spent by them.

However, Droopy keeps talking about wealth and the creation of wealth, and he never talks about it in terms of production—it is always in terms of money.

[_Analytics]

If we are sick of bridges, let's look at another example:

Example 2
I’m interested in selling my house and I have it appraised. The appraiser tells me, “as-is, you could sell your house for $300,000. Your fence really needs to be painted. I can tell you with 100% credibility that if you pain your fence, you could sell your house for $305,000.”

Scenario A: I pay somebody $500 to paint my house. How much wealth was created?

Scenario B: I spend a weekend painting it myself. How much wealth was created?

Scenario C: I get a letter from the Home Owners Association (i.e. the government) saying that they are going to paint my fence because that is a benefit included in my association dues. Using money from the dues, they pay somebody $500 to paint my house. How much wealth was created?

Scenario D: A local volunteer organization decides to paint my fence for me for free as a random act of kindness. How much wealth was created?

[_Gadianton]

anyway, yea, I think I understand Droopy’s sources’ point about crowding out. Their point is that If the government didn’t tax me so much last year, I could have purchased a yacht, and that the yacht purchase would have stimulated the economy just as much as the economy was stimulated by my money being redistributed to poor people and then being spent by them.

Now think from Droopy's perspective. If you've read this same thought experiment a thousand times from a thousand conservative sources using slightly different examples, then you're going to feel very certain that as a universal rule, crowding out ensures that government can never create wealth. Call this the prime directive.

So if someone brings up the notion of an externality and whether or not government has a role in society, Droopy is surprisingly agreeable, he's no anarch-capitalist. But eventually, the prime directive takes over and the end result is that government might have a role, but the prime directive ensures that in no way can we speak of that role in direct relation to creating wealth. While I see your point about "new wealth" vs. "wealth" or income vs. stock, this is one of many confusing ways that he speaks when discussing the bridge example, the only real constant I've seen is his citations of crowding-out arguments. In this case his own source, as you pointed out, agrees with you. But the prime directive still takes over and forces him to re-work all these other ideas into consistency.

He's assuming the conservative position has a universal theory of "wealth creation", and it doesn't. I'm not saying this is a flaw, his own source points out two different contexts to consider the question in and that's not a flaw. Where he needs help is in understanding that context matters, and that his crowding-out citations are relevant in macro discussions surrounding full employment and government spending, but not every discussion. The discussion you're trying to have has nothing really to do with macro theories, but no matter how you put it, even if you can get him to agree with your logic, the prime directive will always take over and the keyboard will type the same final position. I see only two real options. You either have to take the torch from me and succeed where I've failed, and convince him of the context issue, or put the word "wealth" in quotes and be satisfied if his logic indicates he agrees with you that the government creates the content of what you call wealth, even if he has to re-define wealth to make sure the government doesn't create any.

[_Analytics]

anyway, yea, I think I understand Droopy’s sources’ point about crowding out. Their point is that If the government didn’t tax me so much last year, I could have purchased a yacht, and that the yacht purchase would have stimulated the economy just as much as the economy was stimulated by my money being redistributed to poor people and then being spent by them.

Now think from Droopy's perspective. If you've read this same thought experiment a thousand times from a thousand conservative sources using slightly different examples, then you're going to feel very certain that as a universal rule, crowding out ensures that government can never create wealth. Call this the prime directive....

It seems Droopy conflates two different things he’s heard. Crowding out from government spending, and good old fashioned redistribution, where highly productive people are taxed and the money is simply given to less productive people. I don’t think Droopy understands the difference between the two, and thinks that “crowding out” is simply a form of redistribution. He seems to think that if the government builds a bridge, it doesn’t create wealth (in can’t, because it is a simple redistribution of wealth from tax payers to bridge-builders, and as such has the same aggregate effect on the economy as simply taking money from the rich and giving it to the poor.

He does seem to see a paradox. The bridge does in fact exist. He tries to deal with it by thinking that since the government paid $10M for the bridge, the bridge must be worth exactly $10M, so that the money that was spent on the bridge was just converted into a bridge that’s necessarily of equal value. Defending that viewpoint is why he takes issue with the hypothetical valuation of my hypothetical bridge. So read this again:

The state taxes (shifts, reallocates) $10 million to build a bridge. Later the bridge appreciates in value to $50 million (meaning precisely what, I'm not sure). How does a government bridge that cost $10 million to build appreciate to $50 million? Who wants to buy a government bridge? What is this alleged $40 million dollar wealth creation? How is it measured and how can it be said that the economy as a whole has grown due to the bridges presence (how is this claimed $40 million understood to be a net increase in the size of the economy?)?

The bridge itself creates no wealth. While it may be said that the bridge encourages or facilitates wealth creation, that wealth creation itself takes place solely within the private sector due to private investment that creates goods/services that other people in the private sector want to purchase using wealth created in other regions of the private sector through other productive economic activity.

[bridges] themselves, however, do not represent created wealth where the term "wealth" means "new net wealth within the economy that represents an expansion of the entire economic pie," and hence cannot be understood to be in any way related to economic growth.

What is clear is that he doesn’t understand the difference between financial assets and real assets.

The discussion you're trying to have has nothing really to do with macro theories, but no matter how you put it, even if you can get him to agree with your logic, the prime directive will always take over and the keyboard will type the same final position. I see only two real options. You either have to take the torch from me and succeed where I've failed, and convince him of the context issue, or put the word "wealth" in quotes and be satisfied if his logic indicates he agrees with you that the government creates the content of what you call wealth, even if he has to re-define wealth to make sure the government doesn't create any.

In a way it’s economic theory, but it’s the theory that everybody from Adam Smith to Karl Marx to Henry Hazlitt to Thomas Sowell agrees with. But unfortunately, A.M. talk radio has caused a huge swath of the American public not to understand some concepts that are truly fundamental.