Economics Questions

Re: How Is Wealth Created?

Lawrence — Tue, 30 Aug 2011 04:05:30 GMT

Libertarianmonarchy.com

Where does Wealth come from?

Professors of economics, philosophers, professional economists and socialists. What do they all have in common? Answer: They have no idea where wealth comes from.

Poverty programs, urbanization, women’s rights, wealth inequality, credit, savings, capital, health, education, foreign aid, democracy, good government, regulations, trade agreements, environment/geography, technology, efficiency etc., or the lack there of, have all been blamed for the poverty seen all around the world. Some of these factors may be technical reasons as to why some countries are poor and others are rich but they are all irrelevant in relation to how wealth is actually derived.

The one and only answer is that wealth is derived from private property.

The profit incentive comes from the desire to acquire private property. Factors of production will all be allocated efficiently if private property rights are respected. Savings only exist because of the ability to accumulate private property. Risk-taking only exists because of the fear of loss of private property. Natural resources are found across the world yet some countries are poor and others are rich. This is because natural resources stuck in the ground are not wealth. Natural resources will be extracted and refined if private property rights are upheld. Credit is only unavailable in poor countries because of the lack of private property rights. Law is the enforcement of private property rights. Contracts are agreements about future private property. If health or education were what poor countries lacked, then why wouldn’t entrepreneurs invest in the health and education of the citizens in exchange for the income that comes from the higher productivity? See more specific examples.

The profit incentive, the economic calculation problem, the ability to invest/take risk, the innovation problem, the desire to save, all require and are rooted in private property rights.

To put it simply, there is no way for wealth to be formed except by allowing humans to have private property rights. This should be clear intuitively. Each person will try to use their private property to make themselves as happy as possible. Any hindrance(coercion) regarding private property will cause distortions and diminish the amount of happiness that can be achieved.

Most economists waste time engaging in rigorous investigation of proximate causes of wealth in hopes of discovering how wealth is formed and how to pull countries out of poverty. Ironically, it is their socialistic mindset that has pushed many into poverty. Their strategy of attempting to identify concrete causes of wealth, or even erroneous fundamental causes such as democracy or good government, is fallacious and hopeless. It is a fool’s errand.

It does not matter how much effort or time the empiricists spend searching. They will never succeed. This is because wealth/utility does not exist in reality. Utility exists in the mind only. Wealth is purely subjective and is clearly synonymous with utility. A photo of a loved one can be worth infinitely more than a monetary fortune.

In order to further understand it must be explained from a different perspective. A more complex and accurate answer to the question is that wealth comes from Human Action. Clearly, this is a praxeological deduction. It is not a stretch from the fundamental praxeological axiom; humans act to remove uneasiness. If humans act to maximize utility then it is clear that utility/wealth is derived from human action.

Put simply, if you allow humans to engage in action, by giving them private property rights, then they will produce as much wealth/utility as possible.

A more precise explanation is as follows. Human action is the bridge between the mind and reality.(Hans Hermann Hoppe, http://mises.org/esandtam/pes1.asp) Reality is private property because ideally you could not disturb or interact with someone else’s property. Access to private property must be possible for human action to occur. If you restrict access to private property(namely through government coercion) you break the link between the mind and reality and therefore prevent Human Action, which prevents any wealth creation.

If we assume that every action is chosen to maximize utility then any coercion will, by logical deduction, lower utility for the individual because it forces someone to choose an alternative to the action that would maximize utility. This statement alone is enough to discredit any government policy.

Instead of wasting billions in foreign aid, attempting to increase health and education, or enforcing other central planning within the economy, the way to unleash infinite amounts of wealth is to enforce private property. The poorest nations on the planet could easily become the wealthiest in a very short period of time if security was provided for these countries so that private property could be safe.

Mises, Rothbard, Friedman and Adam Smith, as well as other giants within the field of economics, intuitively came to the conclusion that free societies would be more prosperous than nations that were socialistic. All of these economists pointed out practical flaws with socialism and described the efficiencies of the free market. However, none have decisively explained what the true source of wealth is.

The answer to where wealth comes from is based on three fundamental insights:

1) Wealth is subjective.

2) Humans act to maximize utility.

3) Humans only have the ability to act if they have freedom(private property over their own body).

Put in any scenario, humans will use their available private property to maximize their happiness. There is no way for government to create additional wealth because humans are already acting to maximize their wealth.

Consider a spectrum that measures varying degrees of private property. With 0% private property rights, the extreme left, we wouldn't own our own bodies and therefore suffocate to death. No one could produce because they don't own anything. This fact is what makes socialism so unproductive. The less private property there is, the less wealth there will be. With full private property rights, human potential would be maximized. People always act to maximize utility and therefore if there are no impediments based on private property they will maximize the amount of wealth in society. Countries such as Cuba, North Korea, or the Soviet Union restricted private property and therefore had very little wealth. Countries such as Hong Kong, Singapore, Taiwan and South Korea have strong private property rights and therefore have become some of the wealthiest nations on the planet.

Re: How Is Wealth Created?

Smiling Dave — Mon, 13 Dec 2010 17:11:20 GMT

What about when our government sells treasuries to China or japan?

Wouldn't that be wealth transferred from those countries to our countries?

That is exactly like the head of a household saying "I am not going to work anymore. I will borrow money from the Chinese and Japanese."

"But how will we pay them back?" asks the wife.

"Who cares? I have transferred their wealth right into our living room."

Bottom line, borrowing money [=selling treasuries], even if you never pay it back, is not the same as creating wealth.

Re: How Is Wealth Created?

Fox McCloud — Mon, 13 Dec 2010 08:53:39 GMT

Government can create wealth, like a high-speed train from San Francisco to Los Angeles for an alleged $10B. But it cannot do so without stealing wealth from others to do so, and neither without necessarily retarding or forestalling the creation of or destroying wealth.

I'd also posit that it's far more likely not to be successful if the government does it, as opposed to the private market--the government can continue to fund it via taxation if it fails; if a private company screws up, it goes bust and the project is transferred over to some other competent company or it's obliterated forever.

I'd also tend to believe that government ventures will necessarily be less successful as they are based on political whims as opposted to profit.

Re: How Is Wealth Created?

Clayton — Thu, 09 Dec 2010 19:15:02 GMT

how is [wealth] created?

By one or more improvements on a natural resource made by one (but usually more) individuals. Innumerable such improvements are what is finally responsible for the vast wealth you see in today's world.

To be more precise, however, you must explain what a good is, since goods are usually many natural resources combined together (consider a pair of jeans, woven from cotton, dyed in indigo, sewn with hemp thread and button and zippered with brass. Services are an improvement on the inputs to the server (the things the server consumes, which are themselves natural resources or derived from natural resources through the services of other servers) resulting in an output action (a massage, tax preparation, etc.) more valuable than those inputs.

Clayton -

Re: How Is Wealth Created?

byafi — Thu, 09 Dec 2010 18:22:43 GMT

Wealth is created by the voluntary exchange of services and privately owned goods, a process known as capitalism.

Since interactions with the state are coerced, not voluntary, it is immediate that the state cannot create wealth.

Re: How Is Wealth Created?

Stephen — Sun, 31 Jan 2010 03:19:57 GMT

Wealth is the aggregate stock of consumer goods. Beyond the amount that an individual can produce with his bare hands using nature given resources, it can be increased overall in only three ways; through capital accumulation, division of labour, and population control.

Government cannot create wealth, it only redistributes existing wealth. This is because government is not a homesteader, or contractor. It is a usurper and an expropriator as is evidenced that consumers do not voluntarily pay for its goods (actually bads) but are compelled to do so.

Re: How Is Wealth Created?

Spideynw — Sat, 30 Jan 2010 18:06:29 GMT

limitgov, I don't see any problem with coming here to ask questions to help with a debate on another forum. I think it is a great way to learn. I hope you will keep asking questions.

Re: How Is Wealth Created?

AJ — Sat, 30 Jan 2010 11:54:15 GMT

There's no harm in asking here. But if you try to debate others using Austrian economics when you yourself have an incomplete understanding of it, you effectively strawman AE.

If you lose, you immediately convince everyone you were arguing with (and the entire gallery) that "AE is BS."

If you win, you achieve a Pyrrhic victory that leaves others with a strawman version of AE that they will later come to find flaws in, leading them to the conclusion that "AE is BS."

I don't say that you must be perfect, but it is at the very least unhelpful to debate non-Austrians based on an understanding so piecemeal that you have to ask basic questions here.

Re: How Is Wealth Created?

Capital Pumper — Fri, 29 Jan 2010 22:32:07 GMT

limitgov:

no, no , no...thats not true....

and I think I finally get it.....

there is no wealth created in the LONG RUN...because we the people have to pay the bonds back!

Ah Ha!.....

I finally get it.....

thanks guys....

That might work on your mom after you're caught taking a nap on your math homework; however, it's not going to fool me.

limitgov:

but yes,

I do come here to win other arguments on the internet.....

reason being....you guys have a much better understanding of economics...

I come here to learn....

I goto the other forums more for pleasure....the pleasure of debating...

How odd. Crusoe wants the house before he acquires the axe, yet he think he can create an axe without savings and investment.

limitgov:

I can't really debate here....I'm more of a padawan here.....

There is no "more here" or "less there". A competent performance, let alone expertise, requires time and effort. There are no shortcuts, and this goes for all disciplines (economics, music, medicine etc...). Learning isn't a linear process either. The first attempt at riding a bike doesn't lead to superior handling and balance. You have have to undergo a period of plasticity through repition. Then the knowledge has to be digested; otherwise you'll be prone to knowledge gaps, resulting in the inability to articulate the information coherently.

Re: How Is Wealth Created?

limitgov — Fri, 29 Jan 2010 16:17:50 GMT

Capital Pumper:

DD5:

"transferred" is a keyword here, and that transferred or borrowed wealth is consumed and then the taxpayer if forced to pay it back.

I don't think he cares. limitgov just wants you to do the work for him, so he can copy and paste it. It's all for some futile attempt to win an internet argument.

no, no , no...thats not true....

and I think I finally get it.....

there is no wealth created in the LONG RUN...because we the people have to pay the bonds back!

Ah Ha!.....

I finally get it.....

thanks guys....

but yes, I do come here to win other arguments on the internet.....

reason being....you guys have a much better understanding of economics...

I come here to learn....I goto the other forums more for pleasure....the pleasure of debating...

I can't really debate here....I'm more of a padawan here.....

Re: How Is Wealth Created?

Smiling Dave — Thu, 28 Jan 2010 22:59:35 GMT

limitgov:

Daniel Muffinburg:

Government can create wealth, like a high-speed train from San Francisco to Los Angeles for an alleged $10B. But it cannot do so without stealing wealth from others to do so, and neither without necessarily retarding or forestalling the creation of or destroying wealth.

well, if you're saying gov. can create wealth by spending even more wealth, then that's not really creating wealth technically.

Yep, I think thats exactly what he meant

Re: How Is Wealth Created?

Capital Pumper — Thu, 28 Jan 2010 22:15:47 GMT

DD5:

"transferred" is a keyword here, and that transferred or borrowed wealth is consumed and then the taxpayer if forced to pay it back.

I don't think he cares. limitgov just wants you to do the work for him, so he can copy and paste it. It's all for some futile attempt to win an internet argument.

Re: How Is Wealth Created?

DD5 — Thu, 28 Jan 2010 22:11:50 GMT

limitgov:

Are you sure about that?

What about when our government sells treasuries to China or japan?

Wouldn't that be wealth transferred from those countries to our countries?

"transferred" is a keyword here, and that transferred or borrowed wealth is consumed and then the taxpayer if forced to pay it back.

Re: How Is Wealth Created?

Jonathan M. F. Catalán — Thu, 28 Jan 2010 22:10:03 GMT

limitgov:

I guess my point is, if the wealth is coming from china or japan, then from the US's point of view...wealth was created....

its kind of hard for me to follow, because I'm not really sure what the hell government bonds or treasuries are or where they come from?

Like I said, government treasuries are bonds which are sold to foreign investors to raise revenue for current spending, without having to tax the people directly. This has to be ultimately paid back, which requires taxation. This is why most countries with runaway debt, fueled by ever increasing social insurance programs, end in bankruptcy (i.e. Argentina.

Re: How Is Wealth Created?

limitgov — Thu, 28 Jan 2010 22:04:08 GMT

Jonathan M. F. Catalán:

limitgov:

What about when our government sells treasuries to China or japan?

What about it? In this case, instead of directly taxing its people, a government finances spending through debt by selling bonds to foreign investors. The case is the same; the government can only take from previously accumulated capital.

I guess my point is, if the wealth is coming from china or japan, then from the US's point of view...wealth was created....

its kind of hard for me to follow, because I'm not really sure what the hell government bonds or treasuries are or where they come from?