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

[_Analytics]

You really think if the government spends $10 million to build a bridge that proves to be worth, say, $50 million, it doesn’t create any more wealth than moving a pile of bricks from one side of the yard to another?

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?)?

Just so we’re clear, just about every economist since Adam Smith (e.g. Karl Marx, Milton Friedman, Paul Samuelson, Paul Krugman, and yes, Thomas Sowell) will agree with what I’m going to say in this response. This stuff is basic and universally agreed upon by everybody who understands the basic questions that Economics proposes.

1. When the government taxes its citizens the $10 million, it shifts wealth
2. When it uses the money to build a bridge it is potentially creating wealth
3. If the bridge proves to be worth more than the $10 million outlaid to build it, the government has created wealth
4. If the bridge proves to be worth less than the $10 million outlaid to build it, the government has destroyed wealth

“Creating Wealth” means through ingenuity and hard work, you create something that is worth more than the inputs required to create it.

There are various ways of measuring how much a bridge is worth. Given that bridges offer immense value to the people who cross them, lots of people would be interested in owning one so that they could collect tolls.

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.

I never claimed that “the bridge itself” creates wealth. I said the bridge itself is valuable, and that the people who created the bridge created wealth by constructing it. The fact that the bridge is owned by the people collectively doesn’t diminish its value or change the point.

Calling a bridge, which facilitates or incentivizes wealth creation, itself a form of wealth creation is just the slight-of-hand, smoke-and-mirrors semantic game of statists.

Nobody said that “the bridge itself is a form of wealth creation.” The argument is that the creation of a valuable bridge is the creation of wealth. Please remember that Thomas Sowell agrees with me on the point.

[_subgenius]

The Ambassador Bridge from Michigan to Canada is appropriate to mention here...especially the fate of billionaire Manuel “Matty” Moroun.
Nevertheless, this bridge set against the discussion on this thread about bridges illuminates that neither of you should be using the bridge metaphor.

So, study the complexity of the creation, ownership, and use of the Ambassador Bridge and then return and report.

[_Analytics]

The Ambassador Bridge from Michigan to Canada is appropriate to mention here...especially the fate of billionaire Manuel “Matty” Moroun.
Nevertheless, this bridge set against the discussion on this thread about bridges illuminates that neither of you should be using the bridge metaphor.

So, study the complexity of the creation, ownership, and use of the Ambassador Bridge and then return and report.

The bridge isn't a metaphor. It is a clear example of what wealth is and how it is created.

According to Wikipedia,

The Ambassador Bridge is suspension bridge that connects Detroit, Michigan, in the United States, with Windsor, Ontario, in Canada. It is the busiest international border crossing in North America in terms of trade volume: more than 25 percent of all merchandise trade between the United States and Canada crosses the bridge. A 2004 Border Transportation Partnership study showed that 150,000 jobs in the region and US$13 billion in annual production depend on the Detroit–Windsor international border crossing.[3]

The bridge is owned by Grosse Pointe billionaire Manuel "Matty" Moroun through the Detroit International Bridge Company[4] in the US and the Canadian Transit Company[5] in Canada. In 1979, when the previous owners of the bridge put it on the New York Stock Exchange and shares were traded, Moroun was able to buy shares, eventually acquiring the bridge.[6] [7] The bridge is responsible for 60-70% of commercial truck traffic in the region.

Manuel "Matty" Moroun (born June 5, 1927) is an American businessman and the owner of CenTra, Inc., the holding company which controls the Ambassador Bridge.[2][3] The latter is significant as it is the only private ownership of a border crossing between the United States and Canada. He bought the bridge from the Bower Family in 1979. It is now estimated to be worth between 1.5 and 3 billion dollars.[4]

http://en.wikipedia.org/wiki/Manuel_Moroun
http://en.wikipedia.org/wiki/Ambassador_Bridge

The Ambassador Bridge is a great example of my point: bridges have immense value. It also provides a concrete example of how to value a bridge and who would buy one.

[_ajax18]

The citizens who paid the taxes created the wealth that is that bridge, not the government who collected from them.

[_Droopy]

Dr. Henry Hazlitt dealt with this problem - also in terms of a bridge - long ago in his classic work Economics in One Lession, and it is important to understand this argument when one hears claims of wealth "creation" through taxpayer-funded or fiat money-funded public works.

A bridge is built. If it is built to meet an insistent public demand, if it solves a traffic problem or a transportation problem otherwise insoluble, if, in short, it is even more necessary than the things for which the taxpayers would have spent their money if it had not been taxed away from them, there can be no objection.

But a bridge built primarily “to provide employment” is a different kind of bridge. When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to be invented. Instead of thinking only where
bridges must be built, the government spenders begin to ask themselves where bridges can be built. Can they think of plausible reasons why an additional bridge should connect Easton and Weston? It soon becomes absolutely essential. Those who doubt the necessity are dismissed as obstructionists and reactionaries.

Two arguments are put forward for the bridge, one of which is
mainly heard before it is built, the other of which is mainly heard after it has been completed. The first argument is that it will provide employment. It will provide, say, 500 jobs for a year. The implication is that these are jobs that would not otherwise have come into existence.

This is what is immediately seen. But if we have trained ourselves to look beyond immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected, a different picture presents itself. It is true that a particular group of bridgeworkers may receive more employment than otherwise. But the bridge has to be paid for out of taxes. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge costs $1,000,000 the taxpayers will lose $1,000,000. They will have that much taken away from them which they would otherwise have spent on the things they needed most.

Therefore for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $1,000,000 taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, radio technicians, clothing workers, farmers.

But then we come to the second argument. The bridge exists. It is, let us suppose, a beautiful and not an ugly bridge. It has come into being through the magic of government spending. Where would it have been if the obstructionists and the reactionaries had had their way? There would have been no bridge. The country would have been just that much poorer.

Here again the government spenders have the better of the argument with all those who cannot see beyond the immediate range of their physical eyes. They can see the bridge. But if they have taught themselves to look for indirect as well as direct consequences they can once more see in the eye of imagination the possibilities that have never been allowed to come into existence. They can see the unbuilt homes, the unmade cars and radios, the unmade dresses and coats, perhaps the unsold and ungrown foodstuffs. To see these uncreated things requires a kind of imagination that not many people have.

We can think of these nonexistent objects once, perhaps, but we cannot keep them before our minds as we can the bridge that we pass every working day. What has happened is merely that one thing has been created instead of others.

The same reasoning applies, of course, to every other form of public work. It applies just as well, for example, to the erection with public funds of housing for people of low incomes. All that happens is that money is taken away through taxes from families of higher income (and perhaps a little from families of even lower income) to force them to subsidize these selected families with low incomes and enable them to live in better housing for the same rent or for lower rent than previously.

No one is denying that some bridges are necessary and useful, and that these bridges (like highways, sewer systems, and telephone lines) facilitate wealth creation. They, 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.

[_Analytics]

Dr. Henry Hazlitt dealt with this problem - also in terms of a bridge - long ago in his classic work Economics in One Lession, and it is important to understand this argument when one hears claims of wealth "creation" through taxpayer-funded or fiat money-funded public works.

A bridge is built. If it is built to meet an insistent public demand, if it solves a traffic problem or a transportation problem otherwise insoluble, if, in short, it is even more necessary than the things for which the taxpayers would have spent their money if it had not been taxed away from them, there can be no objection.

So, Mr. Hazlitt has no objection to my hypothetical bridge. Great; I’m glad he agrees with me.

No one is denying that some bridges are necessary and useful, and that these bridges (like highways, sewer systems, and telephone lines) facilitate wealth creation. They, 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.

Why do you cling to this definition of wealth? Not only is it confusing (“wealth is new net wealth” come on!), it is totally idiosyncratic—ever since Adam Smith wrote The Wealth of Nations, economists of all stripes have agreed with what Smith says wealth is, and with how he says it is created. If the government builds a bridge “to meet an insistent public demand,” Mr. Hazlitt has no problem with it because the construction of it constitutes the creation of wealth.

Remember—the topic is what wealth is and how it is created. Hazlitt’s analysis totally supports my view—whether the construction of a bridge constitutes the creation of wealth depends upon how valuable the bridge is, and how much it costs to build it.

[_Bret Ripley]

Remember—the topic is what wealth is and how it is created. Hazlitt’s analysis totally supports my view—whether the construction of a bridge constitutes the creation of wealth depends upon how valuable the bridge is, and how much it costs to build it.

All I saw Hazlitt say was "there is opportunity cost associated with building a bridge, and my unsupported assertions have stacked the deck so the opportunity cost will always appear too high."

[_Gadianton]

Droopy,

Are you trying to be impossible?

Dr. Henry Hazlitt agrees with Analyitics! Although, I don't think his explanation is very good because he does not distill the important concepts.

A bridge is built. If it is built to meet an insistent public demand, if it solves a traffic problem or a transportation problem otherwise insoluble, if, in short, it is even more necessary than the things for which the taxpayers would have spent their money if it had not been taxed away from them, there can be no objection

Hazlitt is saying in this case, the government is creating wealth just as Analytics suggests. But because every economist in the world would agree, it's entirely uninteresting. Yes, there can be an objection here. That is, the real issue between libertarians and liberals is going to be one of two things. The first: Can government create a bridge as efficiently as private industry can create a bridge? If it can't, then who cares if it can create wealth? The pro-government argument here will be that if there is a cost-benefit justification, then the government must build the bridge because it represents a market failure for free enterprise. If private industry doesn't have an incentive to build the bridge, even if it will result in greater overall wealth for the economy, then government is on the table. Not everyone agrees that road-building represents a market failure. Your Austrian buddies don't agree. So this is issue#1.

Again, whether or not a bridge is cost-justified holds for whoever builds the bridge. And it's patently stupid to argue about whether government can create wealth on these terms, obviously, it can.

But a bridge built primarily “to provide employment” is a different kind of bridge....

The second issue, which Hazlit handles terribly, is whether or not the government can stimulate the economy by building bridges. In this case, the cost-benefit justification is mostly irrelevant as are market failures, er, at least market failures that result in the need for a bridge. The consideration here is if by stimulating demand via public works, consumers collectively can buy themselves out of the supposed general glut, and bring the economy back to full output. This is why it's been suggested it doesn't matter if you pay people to dig holes and fill them up again. The work being done is a distant secondary consideration.

So when a liberal like Analytics asks you if the government can create wealth, instead of looking like an idiot by saying "no" and then citing a source that agrees with him, tell him to get lost if all he means is whether or not government can build a bridge that's cost-justified in the trivial sense. Force him to either discuss a) market failures or b) deficit spending (keynesian economics).

[_Darth J]

"wealth" means "new net wealth..."

"Tautology" means a "tautological phrase" that expresses a tautology.

[_Analytics]

Droopy,

Are you trying to be impossible?

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.

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.