Hi, I'm new,
From the perspective of say's law, how are real wealth and real income created. According to logic there are two ways in which real income is increased.
1) Increase your productivity and thus your purchasing power increases
2) Others increase their productivity, industry competetion occurs, drives down prices, and thus increases your purchasing power.
But, metaphysically speaking, how does this happen? Say's law says that your purchasing power, and thus income, is determined by your ability to produce. Thus, if your producitivty increases, this should increase your purchasing power and thus your real income and thus wealth. But this is a chicken and an egg problem. Let me use an example.
Let's say all spending equals income in the economy and it is in perfect equilibrium. Each individuals real income equals his spending, and all total income equals total spending. Each individual's spending power is determined by his income, which is determined by his producitivty.
Let's a say I am a shoemaker in this situation. Given my labor, capital, land, and technology I can produce 50 shoes each week. This determined my purchasing power and thus my real income, spending and wealth, etc.
Then, my producivity increases through an new innovation and I ca now produce 100 shoes with all the same previous resources. According to basic theory this means I should become wealthier and my standard of living should increase.
But if nobody else's real income has gone up, then who can purchase my new 50 shoes? My purchasing power can only increase if other's purchase my goods. But there's nobody to purchase it.
Its like there's some missing gap here that I'm missing. In other words, how do you put say's law and economic growth together, at its deepest metaphysical level. I can't figure it out.
Help is appreciated,
Joe
I think I got it.
Before, I was thinking that the value of a good is metaphysically and objectively set in stone. As if Moses came down and told use how much a shoe is worth. But it is purely subjective.
To an individual its value as consumption is determined by its marginal utlility to him, thus the demand curve. Now, to the producer an increase in productivity and technology does not mean that suddenlly he produces a million shoes, but merely that his marginal cost of production has fallen. It is now cheaper to produce one more for himself. This means he is now willing to sell a show for less of someone else's "real goods" as long as benfits outway costs. His real income will now go up because he can sell more shoes even though each one individually will fetch less real goods in return.
Consumer's real income ALSO goes up because each of their goods, can now fetch more goods from a trade, namely, a shoe.
So, let's say we have island with Crusoe and A - G. Each specilalize, but nobody's productivity ever goes up. But Crusoe, the shoemaker his productivity does go up. This means that his real income will go up by say 10%, but each other A - G will only go up by maybe 1%.
This is like Henry Ford, he grew super super rich, but everybody also grew a little more rich because their incomes could buy "more" real goods, a car.
One more confusion. In a barter economy an exchange is spending and buying at teh same time. When Crusoe and the others exchange the exchange IS their real incomes going up. But let's say we have monetary economy in full equilibrium. He sells them his new cheap shoes, his real income goes up by 10%. Then he needs to spend it so he goes to them and spends that money. Their realy incomes now went up, and they spend it on his stuff. And so its just an endless spiral of spending and incomes going up. But thats ridiculous. What makes perfect sense now in the abrter economy is still difficult to visualize int eh money economy.
Thanks.
You just have to look at money as a highly marketable good that is traded in the same way any other good is in a barter system. In your example, pretend that there is a person H producing good H. When A buys goods from C he gives him some H. C then gives H to B when he wants to buy from B and B gives H to A when he wants to buy from A. It's exactly the same as a barter economy except sometimes people use what they previously purchased to make further purchases.
Let's say, for example, you make a bunch of shoes. I may buy some shoes from you and then later realize I don't want that many shoes. I could then trade your shoes for someone else's good at the same rate I bought them from you. In the end the shoe distribution is basically the same, but the shoes may have changed hands a few times before settling in their final resting places where they are consumed (saved). If we then assume your shoes are indistructable, I may later use shoes that I was consuming (saving) and trade them away in exchange for something else. In this example we have been using shoes as a form of currency.
This explanation is rather poor so if you still have trouble understanding it let me know and I will take another shot at it.
Well, since this was already bumped, I might as well add these...coincidentally found and read them just today when doing research for another purpose:
If we're linking to stuff, here's an article on Say's Law by Steven Kates: http://mises.org/journals/qjae/pdf/qjae13_4_1.pdf
He has also written (as Tommy Wiseau would say) "a book aboudit".
Incidentally, Kates is a far as I know the only Austrian-leaning academic economist in my country (I really hope there are others).
I've been thinking about this for the last few days and I'm back at square one. Even in a simply three man barter economy I don't understanding why an increase in productivity increase everyone's wealth.
So, I am creating a little model of an economy with... 1. Butcher, Baker, and Tailor. 2. There are a total of three trades. 3. Relative real prices of 1 clothes = 4 bread = 8 meat
I attempted drawing out the trades solely by stating how much of each item is traded in each of the three trades. I then increased the productivity of the tailor and thus the real relative prices became.... 1 clothes = 2 bread = 4 meat. Here, the baker and butcher are wealthier because each of their goods purchases more clothing. But I don't see how this makes the tailor wealthier. I then realized that while I was including marginal cost of production I didn't include marginal utility - that since the price of clothing fell the baker and butcher would now order more clothing than before.
So, now I'm trying to create supply and demand graphs for each of the three trades to actual show this in real time so that I can get a clear visual in my head. But I'ms stuck because I can't figure out what and how many supply graphs for each trade: 1, 2, 3, or, 4. What should be on teh x and y axis, and how everything should look. I've thought through everything But I don't see it.
I tried having only one graph for each trade. Say, for the baker/butcher trade meat horizontally and bread vertically. Each of them would thus have one line outlining their preferred deals, with the equilibirum being the one the come to. However no matter how I set up the lines they are internally incosisntent.
When the tailor doubles his clothing production the cost won't half. The cost will decrease but always at a slower rate than the production increases.
So if the tailor now produces 3 times as many cloths, they may be worth half as much, not one third as much. Does this resolve your problem of how the tailor ends up wealthier? How much a good decreases in value as production increases depends on the good but it will always be somewhere between no change in cost and the production amount but never equal to those two.
So if you made 100 shirts in a day originally and they were worth $1 each and then you started making 200 shirts in a day their new value would be ($0.5, $1). Note the ( and not [ indicating that they will not be worth $1 or $0.5, only something in between those numbers.
I think so, I have a rough idea in my head of what's going on. But I'm going to continue trying to graphically portray this through a supply and demand graph of barter trade.
Thank you for all your help!
Lets say the tailor originally made two shirts every six months. The other guys have to buy new shirts every six months due to wear and tear. Then the tailor doubles his productivity and makes four shirts.
When the other guys wear out their old shirts, there is no reason for him to sell his shirts any cheaper. Why should he? Even though he has more shirts in his warehouse, he knows they are willing to pay the old price for the first two shirts.
He then sells them the two extra shirts that came from his increased productivity for cheaper, knowing they don't need extra shirts as badly.
What he gets for his extra shirts is his increased wealth, them having extra shirts is theirs.
Now to make sure we get what these supply and demand curves are about, let's quote Hazlitt:
All valuation begins in the minds of individuals. We are accus- tomed to saying that market value is determined by supply and demand, and this is as true of money as of other commodities. But we should be careful not to interpret either supply or demand in purely physical terms, but rather in psychological terms. Demand rises when people want something more than they did before. It falls when they want it less. Supply is more often thought of in a purely physical sense, but as an economic term it also refers to psychic factors. It may vary with price. At a higher price producers may make more of a commodity, or be ready to offer more of the existing stock for sale.
He's saying that
1. Supply= willingness to sell and Demand = Willingness to buy.
2. Make no mistake, supply is also a subjective thing. Of course it is influenced by physical considerations, but it's ultimately exactly as subjective as demand.
When AE talks about how value is subjective, they don't mean "But we are talking about the buyer. The seller is a robot, whose value scale can be determined with a mathematical formula and a chart." The sellers willingness to sell [=Supply] is also subjective.
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joemac: So, now I'm trying to create supply and demand graphs for each of the three trades to actual show this in real time so that I can get a clear visual in my head. But I'ms stuck because I can't figure out what and how many supply graphs for each trade: 1, 2, 3, or, 4. What should be on teh x and y axis, and how everything should look. I've thought through everything But I don't see it. This depends on whose perspective you are drawing the graphs for. From the perspective of the tailor, clothes in units should be on the horizontal axis (quantity of clothes supplied), and bread in units should be on the vertical axis (price of the clothes supplied in terms of bread). Because of diminishing marginal utility, the supply curve (from the tailor) should be upward sloping, while the demand curve (from the baker) should be downward sloping. From the perspective of the baker, the roles are reversed, so the quantity is bread and the price is clothes. There should be a total of six graphs for all possible permutations of clothes, bread, and meat. For a more detailed explanation, refer to this thread for the barter example (direct exchange): http://mises.org/Community/forums/t/14325.aspx I would also recommend you read the first few chapters of Man, Economy, and State by Murray Rothbard. | Post Points: 20
I figured it out!
I drawed out three s & d graphs, one for each trade. When productivity of the butcher happened the following occured...
1. The value of meat relative clothes and bread goes down, as the supply curve of meat shifts down
2. The demand for meat goes up.
3. The total amount of bread and clothes that the butcher gets as income goes up, thus his real income goes up.
4. The total amount of meat that the tailor and baker get goes up, thus their real income goes up
Fantastic!
Now, all I have to do is figure out how all this works with money! Will be back with more really annoying questions!
Money (in theory) is just another good (like cloths, bread, meat, etc.) except new money isn't produced (ideally) and money isn't destroyed (ideally). This means there is a fixed amount of money in the economy giving it a flat amount of supply and demand if I using the terminology correctly here.
Money (in theory) is just another good (like cloths, bread, meat, etc.) except new money isn't produced (ideally) and money isn't destroyed (ideally).
I do not think changing the amount of money is bad per se, provided the cost of producing money is high enough (e.g., mining gold).
Because of diminishing marginal utility, the supply curve (from the tailor) should be upward sloping, while the demand curve (from the baker) should be downward sloping.
The graph represents relationship between utility of two goods, why do you want to treat one of them preferentially?
Andris Birkmanis: Because of diminishing marginal utility, the supply curve (from the tailor) should be upward sloping, while the demand curve (from the baker) should be downward sloping. The graph represents relationship between utility of two goods, why do you want to treat one of them preferentially?
This is getting a bit off topic and if you are interested in a discussion about it I would be interested in discussing the merits of inflation/deflation in another thread. However, I think that for money to optimally serve it's purpose no inflation or deflation should occur. Both inflation and deflation, while not terrible for money, is suboptimal in my opinion.
Andris Birkmanis: Think Blue:Because of diminishing marginal utility, the supply curve (from the tailor) should be upward sloping, while the demand curve (from the baker) should be downward sloping. The graph represents relationship between utility of two goods, why do you want to treat one of them preferentially? The preference is arbitrary. The demand and the supply curves could had been easily priced in terms of clothes, instead of bread (as per the above example), and the roles would had been reversed. | Post Points: 5
Think Blue:Because of diminishing marginal utility, the supply curve (from the tailor) should be upward sloping, while the demand curve (from the baker) should be downward sloping.