Economics Questions

Re: Help! This Keynsian guy says government CAN AND DOES create wealth..refutations?

Southern — Tue, 08 Feb 2011 19:27:18 GMT

It's just common sense.

Common sense would suggest that you and I could only guess. We can only know after the fact by observing his actions.

A and B go to court because A stole a loaf of bread from B. The court awards B $10,000. A refuses to pay. Now what?

Nothing, anything beyond the agreed upon price between the two parties is irrelevent to our discussion.

Did you miss the part about not being a one-off payment? (If you think $3.00 is fair, buy the milk; if you don't, don't. But if you only have $1.00 on you, and the milk-seller agrees to give you think milk now and take remaining $2.00 next week, and next week you refuse to pay up, then what?)

It dosent matter whether its a one time payment or installments. A price was agreed on and that price reflects the two parties subjective values. Anything beyond that is irrelevent.

The behaviours of imaginary people we're making up?

I bought a sandwich today. Prior to me buying the sandwitch you have no information about my value scales. After I purchased the sandwich you do. I value the sandwich more than the $7 it cost me. The owners of the sandwich shop valued the $7 more than the sandwich. Our subjective values were translated into an objective price.

To clarify something that may be confusing the issue. Can government create wealth is the question. I am approaching this question from a strickly economic perspective. Which means I am limiting my consideration to only economic goods. Economic goods have exchange values which are prices. By comparing the prices of what was lost versus what was gained is the only way, in my opinion to answer the original question.

Re: Help! This Keynsian guy says government CAN AND DOES create wealth..refutations?

Southern — Mon, 07 Feb 2011 22:57:14 GMT

http://mises.org/daily/4907/Subjective-Value-and-Market-Prices

Sorry havent had time to post, but I think this link is relevent to what we have been discussing.

Re: Help! This Keynsian guy says government CAN AND DOES create wealth..refutations?

Paul — Tue, 01 Feb 2011 00:30:00 GMT

Yes, you have no way of knowing. As far as we know his valuations are the same.

It's just common sense.

What is "fair"? That too is subjective. And since when do prices have to be fair? You are introducing your subjective preferences into situations that dont involve you.

No I'm not. It has nothing to do with me.

A and B go to court because A stole a loaf of bread from B. The court awards B $10,000. A refuses to pay. Now what?

Ultimately, the court is relying on everybody else to enforce it's judgement -- if other people think $10,000 is fair, A can be ostracized until he pays up: people who sell food can refuse for sell to him, etc. But if those people think $10,000 is ridiculous, they won't do that -- then the court has no power.

Is $3.00 a fair price for a gallon of milk?

Did you miss the part about not being a one-off payment? (If you think $3.00 is fair, buy the milk; if you don't, don't. But if you only have $1.00 on you, and the milk-seller agrees to give you think milk now and take remaining $2.00 next week, and next week you refuse to pay up, then what?)

We dont have to assume anything. We can observe their behaviors.

The behaviours of imaginary people we're making up?

Re: Help! This Keynsian guy says government CAN AND DOES create wealth..refutations?

Southern — Mon, 31 Jan 2011 16:13:21 GMT

Assumption about what? That his valuations before and after are different?

Yes, you have no way of knowing. As far as we know his valuations are the same.

Whatever "objective price" is arrived at has to be within the ability of the arsonist to pay, or it's meaningless; and if it's to be enforced over any length of time (i.e., not an immediate one-off payment) it has to attune with other people's standards of "fairness", too. That's what I meant by "reasonable".

What is "fair"? That too is subjective. And since when do prices have to be fair? You are introducing your subjective preferences into situations that dont involve you. Is $3.00 a fair price for a gallon of milk? Whether or not the outcome is fair is entirely up to the buyer and seller or in this case the victim and wrongdoer.

In the real world, of course you can't know;

We can stop right here. I am talking about the real world and we can know something. We can know by observing thier actions, the results of thier trades. From that we can know minimum and maximum value people assign to objects. That is all we know and the only information we can use when trying to answer the questions raised in this thread.

Anything beyond what we know or observe is speculation. Untill we have some other way to peer into the minds of people we will just have to be content with the limits of our knowledge.

but we're positing a scenario in which the "people" are mental constructs whose internal values we must assume we know in order to be able to talk about it in the first place.

We dont have to assume anything. We can observe their behaviors.

Nevertheless, some level of compensation will presumably be found by your arbitration system...you said that was an "objective price", right? So is it the true "value" of his family, or isn't it? :)

Well I dont know. I have some issues with trying to apply a price too broadly. If you can address these concerns then maybe it is.

Why would he be titled to any compensation for the death of his family? The wife or child are not his property. The wife and child are self owners. They are the victims. They are the ones who were deprived of something not him.

Can you have prices in a "market" for human lives? A life is something nontransferable. It seems nonsensical to talk about a market price for something that can be traded.

A human life is unique. When a house is burned, it can be replaced. When $100 is stolen it can be replaced. If someone shoots you in the head... well you cant be replaced. The victim of a murder cant ever be made whole again.

The loss of life is a very different situation than the loss of a peice of property.

No it seems in this case that using prices derived through a market mechanism would not suffice in this case.

Re: Help! This Keynsian guy says government CAN AND DOES create wealth..refutations?

Paul — Sat, 29 Jan 2011 01:38:46 GMT

There's a difference between the owner's valuations before and after the arson: after his house has burned down,

You are making an assumption. You have no way of knowing.

Assumption about what? That his valuations before and after are different?

What is reasonable? That, just like value, is entirely subjective. Through the negotiations between the arsonist and victim, an objective price will be formed that reflects those subjective concepts.

The victim may want 10 billion dollars, but only a handful of people in the world could ever actually pay that. Whatever "objective price" is arrived at has to be within the ability of the arsonist to pay, or it's meaningless; and if it's to be enforced over any length of time (i.e., not an immediate one-off payment) it has to attune with other people's standards of "fairness", too. That's what I meant by "reasonable".

Through negotiations in a market, he reveals his value scale. All we know is what is revealed by his actions. You can say that he took $200k but he really valued the house at $1million. But you would have no way of knowing if that was indeed true. It would be an assumption.

In the real world, of course you can't know; but we're positing a scenario in which the "people" are mental constructs whose internal values we must assume we know in order to be able to talk about it in the first place.

Of course not, his family is not an economic good with market value.

Nevertheless, some level of compensation will presumably be found by your arbitration system...you said that was an "objective price", right? So is it the true "value" of his family, or isn't it? :)

Re: Help! This Keynsian guy says government CAN AND DOES create wealth..refutations?

Southern — Thu, 27 Jan 2011 20:00:10 GMT

There's a difference between the owner's valuations before and after the arson: after his house has burned down,

You are making an assumption. You have no way of knowing.

there is no way the house can be returned, so for the sake of compensation he has to put some "reasonable" value on it which may well be less than he would have been willing to sell the house for.

What is reasonable? That, just like value, is entirely subjective. Through the negotiations between the arsonist and victim, an objective price will be formed that reflects those subjective concepts.

Through negotiations in a market, he reveals his value scale. All we know is what is revealed by his actions. You can say that he took $200k but he really valued the house at $1million. But you would have no way of knowing if that was indeed true. It would be an assumption. What do we know for fact... He took the 200k. That is the limit of our knowledge.

Imagine his wife and children had been inside the house when it burned down: if the would-be arsonist had come to the door and asked him "how much would it take for you to let me burn your house down with your wife and child inside?", you can well imagine that he might respond "I wouldn't agree to that no matter how much you paid me"; i.e., his price is effectively "infinite".

The wife and child are not property. It really has nothing to do with the discussion. We are talking about the value of property, what is wealth, how is it created, how do we know that it is created (in an economic sense).

But after the fact, there's no way to get his family back; any compensation they agree to isn't the "market value of his family".

Of course not, his family is not an economic good with market value.

Re: Help! This Keynsian guy says government CAN AND DOES create wealth..refutations?

Paul — Thu, 27 Jan 2011 01:09:16 GMT

There's a difference between the owner's valuations before and after the arson: after his house has burned down, there is no way the house can be returned, so for the sake of compensation he has to put some "reasonable" value on it which may well be less than he would have been willing to sell the house for. Imagine his wife and children had been inside the house when it burned down: if the would-be arsonist had come to the door and asked him "how much would it take for you to let me burn your house down with your wife and child inside?", you can well imagine that he might respond "I wouldn't agree to that no matter how much you paid me"; i.e., his price is effectively "infinite". But after the fact, there's no way to get his family back; any compensation they agree to isn't the "market value of his family".

Re: Help! This Keynsian guy says government CAN AND DOES create wealth..refutations?

Southern — Wed, 26 Jan 2011 17:26:40 GMT

What you quoted was an intial thought that was superceeded by my posts that followed. The posts that followed in essence agreed with your assessment.

Having "a market" and "prices" doesn't help at all. Prices are only what people are actually buying and selling things for. If the owner hasn't actually sold his house, you have no idea what it's worth. You can't know what he "would have" sold his house for, short of actually offering him the money and seeing if he accepts.

Actually I agree with most of what you have said here. I have tried to address this with the condition that there has to be a ready market for the property. That would mean that in many (maybe even most cases) you are absolutely correct. That is best I can come up with at the moment, but Im going to put some more thought into it.

One of the reasons I am not willing to concede the point completely is that there has to be a way to know. If not then how would people be compesated in the event of arson or theft? If there is trully no way of know the value that was lost by the victim then there would be no way of compensating the victim rationally.

Now that I think of it, a market and prices could in fact actually reveal the value lost by the victim. It would have to be through a court system where the arsonist could be found guilty. Allowing the arsonist and the victim or their agents to negotiate the compesation would reveal exactly how much the victim lost (how much he would be willing to accept). For example I will take x amount for the loss of my home, y amount for the time/discomfort/pain/etc.

Any thoughts?

Re: Help! This Keynsian guy says government CAN AND DOES create wealth..refutations?

Paul — Wed, 26 Jan 2011 05:14:37 GMT

On the face I would say no. You have only burned down a house. That economy started with a house and 10 cows. After there were only 10 cows. At a simple glace it appears that you have destroyed wealth.

Whether or not there's an increase in wealth depends on whether the owner of the house (A) values the ash left over after the burning more than the house...but if he did, he would have already burned it himself. Given that B burned it down without A's consent, it's impossible to say whether or not there has been an increase in wealth (we can assume that C values the ash more than the house, since he ordered the arson, but you can't compare C's valuations to A's, in order to be able to say that C's gain was greater than A's loss and so there's been an overall gain).

Same problem with this:

I have claimed that government or a thief can create wealth by first taking from you and then transforming it into something with more value than what was taken. And the way I am measuring value here is its market value.

but there's no way to compare the increase in value for the thief with the loss of value for the victim, so you can't say there's been a gain in overall wealth. (Clearly any theft results in a gain in wealth for the thief (assuming he isn't caught)—that's the point, after all)

Having "a market" and "prices" doesn't help at all. Prices are only what people are actually buying and selling things for. If the owner hasn't actually sold his house, you have no idea what it's worth. You can't know what he "would have" sold his house for, short of actually offering him the money and seeing if he accepts.

Re: Help! This Keynsian guy says government CAN AND DOES create wealth..refutations?

Southern — Tue, 25 Jan 2011 20:15:54 GMT

It seems that prices are just arbitrary in a lot of cases. But the scenarios I was thinking about were all situations where one part is exploiting some form of monopoly position, local glut or information asymmetry

I would feel that even if any of these situations arose in a free market the prices that would be formed would still reflect the personal value scales of the market participants. Sellers will take anything above a certain price, while buyers will pay anything below a certain price. So if a seller finds himself in a position where he is the only seller he still cant charge anything he wants. The buyer will still only pay up to a certain point for the product.

While these situation, I think, would still change prices. It would not be because those prices are just some arbitrary number dreamed up by one party. The chain of events would be like this.... The realities of the market change (ex someone achieves a virtual monopoly, there is a glut of a product, or lack of information about a product) which causes people personal, subject value scales to change, which then changes the prices.

Re: Help! This Keynsian guy says government CAN AND DOES create wealth..refutations?

EmperorNero — Tue, 25 Jan 2011 12:04:32 GMT

Southern, regarding our debate on page 4 of this thread. You were right, values are subjective and prices are objective. I was mostly objecting to the latter point. It seems that prices are just arbitrary in a lot of cases. But the scenarios I was thinking about were all situations where one part is exploiting some form of monopoly position, local glut or information asymmetry. In a competitive market prices would indeed be an objective measure of how much people value products. And we would know that someone who spent 3 Dollars got more value than someone who spent 2, if they had the same preferences.

Re: Help! This Keynsian guy says government CAN AND DOES create wealth..refutations?

Southern — Mon, 24 Jan 2011 20:57:03 GMT

So...what has really taken place in this scenario? Obviously B is better off because he got 10 cows. For him, this payment was worth more to him than the effort and risk involved in burning the house. He gave up something, and got something he valued more. B is wealthier. By the same measure, C is better off because the house has been burned down. Obviously, to him, this was more valuable than the cows he gave away, or else he wouldn't have given them. He gave up something, and got something he valued more. C is wealthier. But what about A? He has given up something, and received nothing in return. Again, if A valued his lot with the charred remains of a house on it more than he did with his house intact, he would have burned it down himself. (In other words, force would not be necessary...B would not have to burn the house without permission.) So A is worse off. B and C are better off at the expense of A.

I would agree with everything that you have said here. But it does not answer the question "was wealth created?" We have no way of knowing without some way of measuring value. If we can't measure how much value was lost by A and how much value was gained by B and C then there is no way of telling whether value lost by A exceeds value gained by B and C.

Southern's point is that if A could get a higher sale price for the rubble than he could have for the house, then wealth has been created...however he adds that "If after his house was burned A would never sell the lot or no one would ever buy the lot. Then we have no way of knowing." I would argue this is incorrect.

The fact that A would not sell the lot would evidence that he values the lot more than anything anyone could offer him for it.

That would mean there is no market price for the home. Therefore there is no way of knowing.

And the fact that he didn't burn the house down already (i.e. that B had to forcibly burn it down without A's permission) would evidence that A valued the house intact more than burned down. So even though he would not sell the house and give us an exact market price...we can still know if value has been lost.

But how much value and how do you compare the value lost to A and the value gained by B and C?

In the same way, if no one would ever buy the lot, (for anything...even a fraction of a cent), then, again, we can know that value has been lost because we would know that A was trying to sell it, and he could not get anything for it.

If no one would buy the lot then there is no market value to use. And again you say value has been lost.... but not how much. If we are to say the wealth in total is being created or destroyed, we have to have some standard for comparison.

And even by Southern's definition, something is only wealth if it has utility and exchange value. (I would argue that's not entirely accurate, but that doesn't even matter for this case). The point is even without exact market prices to compare, we know new wealth has not been created in this scenario, it is just existing wealth that has been stolen.

You dont know anything of the sort. You have assumed that the value that was lost by A exceeds the value gained by B and C. Yet you have no way of comparing the subjective value scales. It is an impossible task. For all we know wealth was created.

What I propose as a way of determining whether wealth has been gained or lost is very similar to how we would determine compensation if someone unjustly steals, damages, or destroys your property. If and arsonist burns down you house and you take him to court... what could you demand from him. Could you simply say your house was priceless and demand everything the arsonist has? No you could demand the "value" of your home, which would be what you could replace your home for, which would be the market value of your home. Any additional damages above and beyond your home is an entirely different matter.

Re: Help! This Keynsian guy says government CAN AND DOES create wealth..refutations?

Southern — Mon, 24 Jan 2011 20:33:59 GMT

It was only after this that you made your statement essentially saying "you can initiate force and then create wealth afterward." This why I said what you were doing was a false cause fallacy...because you were claiming one thing could be the reason for another when the facts do not show anything of the sort. It sounded like you were essentially saying: “yes, wealth can be created through force…because you can initiate force and then create wealth afterward.”

I do appologize for not being as clear as I could have. I did not think that Charles meant that literally wealth is created when something is stolen or someone is enslaved. That was the reason I chimed in at that point. I may be mistaken about what he actually meant. Though it seems that we were indeed talking about different things. Im glad we have that cleared up.

Re: Help! This Keynsian guy says government CAN AND DOES create wealth..refutations?

Lyle — Mon, 24 Jan 2011 06:01:25 GMT

The government doesn't create wealth, it steals it, directly by taxes or indirectly by inflation. Government admits that it does not create wealth but that all its attempts are to REDISTRIBUTE wealth. To government, "wealth" is synonymous with "purchasing power."

Re: Help! This Keynsian guy says government CAN AND DOES create wealth..refutations?

John James — Sun, 23 Jan 2011 12:52:15 GMT

MaikU:
a hyphotetical situation to both of you:

there is a man A, man B and a man C.

A has a house. C offers a proposal to B: if he burns down A's house, C will give him (B) 10 cows.

B accepts it and burns down A's house.

Has in this situation been created wealth or not (among these three people)?

(suppose I am economical illiterate, which is not too far from truth).

I think Southern offers a decent answer to your question here. But I would still argue that to a detail, it is incorrect. Just because A may be able to fetch a higher dollar payout for an empty lot with fire rubble than he would for the lot with the house on it, doesn't mean he values that more. Obviously, if the man valued his house at less than what he could get for burning it down and selling the lot (essentially no different than selling the house), then he would have already done this. Evidently the man values his house more than that.

So...what has really taken place in this scenario? Obviously B is better off because he got 10 cows. For him, this payment was worth more to him than the effort and risk involved in burning the house. He gave up something, and got something he valued more. B is wealthier. By the same measure, C is better off because the house has been burned down. Obviously, to him, this was more valuable than the cows he gave away, or else he wouldn't have given them. He gave up something, and got something he valued more. C is wealthier. But what about A? He has given up something, and received nothing in return. Again, if A valued his lot with the charred remains of a house on it more than he did with his house intact, he would have burned it down himself. (In other words, force would not be necessary...B would not have to burn the house without permission.) So A is worse off. B and C are better off at the expense of A. Therefore, wealth has not been created. It has only been transferred.

B and C have done nothing more than stolen wealth from A.

Southern's point is that if A could get a higher sale price for the rubble than he could have for the house, then wealth has been created...however he adds that "If after his house was burned A would never sell the lot or no one would ever buy the lot. Then we have no way of knowing." I would argue this is incorrect. The fact that A would not sell the lot would evidence that he values the lot more than anything anyone could offer him for it. And the fact that he didn't burn the house down already (i.e. that B had to forcibly burn it down without A's permission) would evidence that A valued the house intact more than burned down. So even though he would not sell the house and give us an exact market price...we can still know if value has been lost. In the same way, if no one would ever buy the lot, (for anything...even a fraction of a cent), then, again, we can know that value has been lost because we would know that A was trying to sell it, and he could not get anything for it. And even by Southern's definition, something is only wealth if it has utility and exchange value. (I would argue that's not entirely accurate, but that doesn't even matter for this case). The point is even without exact market prices to compare, we know new wealth has not been created in this scenario, it is just existing wealth that has been stolen.

So again, wealth cannot be created through force.

Now, as for "has wealth been destroyed"...that is a much different question which may very well require actual prices to determine. (But of course, on the surface, we can more or less guess that the market price of a lot with a house is higher than the same lot with a burned rubble. I would not feel uncomfortable contending that wealth has been destroyed, even without the prices to prove it.)