Wealth is capital. In your example of boys selling lemonade, wealth is the tangible items they possess: lemons, blenders, a sign, a wood stand, and glasses of lemonade. Wealth is created by applying labor and knowledge to increase the value of tangible goods. The boys turn a lemon tree into a bucket full of lemons by spending all day picking lemons from tree on their farm. They paint a sign themselves, and spend time walking around the neighborhood advertising. They use a hammer and nails to build a wooden stand out of old boards. They create wealth by taking material goods, and through the sweat of their labor, making those goods more valuable than before. They sell glasses of lemonade to thirsty neighbors, thus making a profit, which is represented by quarters in their tip jar. In short, they "turned lemons into lemonade."

Now, enter the government. The government did not spend time in a field picking lemons, or painting signs, or standing around on a hot day making a sales pitch about lemonade. The government walked by and took a few pennis from the tip jar. It then went down the street to two boys who didn't have access to a lemon tree, who didn't have any old wood scraps, and didn't have any paint to make a sign. It gave them the money it got from the first boys, and suggested they go to Walmart and buy some materials for a lemonade stand.

If the government had not taken their money, the first boys could have used their profits to expand their business by building another lemonade stand down the block. Now, the first boys have to compete with another lemonade stand. The first boys sell fewer glasses by exactly the amount the second boys sell. It is true, the second boys are now employed where before they would just sit around all day doing nothing, but the amount of wealth, as measured in lemonade stands is exactly the same as it otherwise would have been.

The government did not create wealth because it did no work. It did not expend labor building any new lemonade stands, or come up with any new products to make out of lemons, it merely took a few pennies from one group and gave it to another.

In many ways, it is likely that the government destroyed wealth. The first group of boys, because they would spend all day in the fields picking lemons, knew the value of squeezing every last drop and so could get a full glass of lemonade from each lemon. The second group of boys, who received money from the government and did not actually spend time in the field picking lemons, did not care that it took two lemons to make a glass of lemonade. The money wasn't theirs, so they didn't take care to get every last drop out of each lemon. By taking money from the first boys, who were more efficient, and giving it the second boys, who were less efficient, the government effectively destroyed wealth--as represented by glasses of lemonade. If the government had not intervened, the first boys could have created twice as many glasses of lemonade. That is, they could have increased the wealth of the neighborhood by an even greater amount.

Henry Hazlitt can probably illustrate it better than I can.

Here is an online version of his 1946 book, "Economics in One Lesson"
http://jim.com/econ/contents.html

Reading the first 20 pages or so (chapters 1-6) should give you a pretty good explanation.

imstellar thanks for that.

problem is, i think it's not that simple. Every explanation of economics seems to be a ridiculously narrow and closed example that only makes sense in isolation. You talk about four boys and 100 lemons and it makes sense... but... As soon as you start asking questions and poking holes in the example, the explanation seems to expand to infinite proportions and make people's heads explode.

I think therefore that economic theory is more about spinning a convincing story of an abstract model, rather than actual facts.

Humans are just not the way economists seem to think they are. My main reason for believing this is that I have worked in creative businesses all my life and I don't see the lemonade stand analogies working in my experience.

I have a narrow closed example of my own:

Boys make lemonade. Government takes small percentage. Government buys paint for artist down the road. Artist makes painting with a markup of 3000%. Lemonade stand starts to look like a waste of time.

you can go on ad infinitum. and then the greedy soulless bankers will come along, bend the rules, take all the money and fuck up the entire economy anyway while you blame "government".

Some parts of the government work exactly as any other company and create wealth in the same manner, by refining a product, doing some form of needed work or similar. The government isn't just taxes and redistribution of wealth.

imstellar, I think you've made a good case for how kids with a lemonade stand are creating wealth, but I'm not sure I concur with your view of what government does with taxes.

In my mind, you're forgetting the sidewalk the kids built their stand next to, that makes their enterprise possible. That's part of what that tax money is for.

I think you're making an argument about government subsidies. Sure, it's a fair argument to say that subsidies in themselves don't create wealth in an economic sense, but the chief arguments made for them aren't economic in nature. That said, I'll concede the point, subsidies don't create wealth.

But that's not the only thing government can or does do.

There's definitely something to the idea that people will be more fully invested in their work if they feel a sense of ownership, but that's more a function of effective management, and doesn't require actual ownership. By the same token, I don't think people will always be unwise with money they receive as a gift/subsidy/tax cut, just as they have quite clearly proven that they will not always be wise with how they spend what they earn.

Can you deny that the Interstate Highway program created wealth? Incentives for a transcontinental railroad spurred growth? Trust busting of the oil and rail companies in the early 20th century restored competition? The invention of the internet? The space race, NASA, and all the discoveries they've brought about? Even the much maligned public education system seems to me a crown jewel of achievement in terms of empowering individuals and enhancing wealth. In other countries, national healthcare systems seem to play a similar role in optimizing their human resources.

Sure, government doesn't seek to turn a profit, but it does seek to catalyze economic growth (to borrow a phrase from Obama's speech tonight).

To deny that government can create wealth seems to be turning a blind eye on what government has already accomplished, and to refuse to see the role it plays in creating and preserving the private economy.

So basically, it sounds like the crux of the conservative argument is that they do not see taxation - whose revenue goes towards creating infrastructure and social systems that individuals could not create on their own - as a rudimentary social contract that you enter into as part of being a citizen in a democracy, but rather theft.

In other words, they are saying that buying services from a business is creating wealth, while buying services from the government is being robbed. When stated directly, without straw men, cute kids, purple prose or appeals to emotion, this argument doesn't make much sense.

That said, I find imstellars story very appealing from a narrative perspective. I was really rooting for those industrious young kids in their struggle against the dastardly G-Men down the block. (Trying to pass off WalMart lemonade as if it were the real deal? Who do they think they are anyway? Sheesh!) I'm not sure if he's written the ending yet, but I would suggest having the g-men both fall into a swimming pool late in the third act, or maybe they could get pantsed in front of all the kids at the Camp Grizzly Bear Talent Show? Anyway, real potential here.

Of course, the story is also an imstellar cream dream. The government would never build a lemonade stand, because a) it's not essential, b) there are plenty of others interested in doing it, and c) there is little need for transparency or oversight in the lemonade industry. The government does, however, build schools. (Which is, incidentally, where the kids who opened the lemonade stand first met.)

The teachers at that school helped the kids hone the skills they would need to open their own business. They learned how to work with wood in wood shop; learned how to create the sign in spelling, handwriting and art classes; learned how to do accounting in math and econ; and learned how to communicate with customers by giving speeches in English.

They also didn't have to worry about security because of the military (nationally) and police (locally). In case of a fire, they could call the fire department. If that mean Mr. Smith from down the block crashed his Humvee into their stand, they could even utilize the court system to recoup damages and lost income.

Even the sidewalk their business was built upon on was taken care of, not to mention the roads, crosswalks and traffic systems that helped people easily access the lemonade stand.

Beyond all the great public works that provided so much opportunity, it also just so happened that the neighborhood teachers, firefighters, soldiers, road workers and police officers loved lemonade, and could afford to buy a cup on a sunny afternoon because of their government employment.

Unfortunately, because of all the government intervention, none of this can be considered wealth. You see, a dollar isn't officially wealth until it's stagnating in some billionaire's bank account. Take that dollar and give it to a fireman, and wealth instantly becomes contraband, but as soon as that dollar trickles back up to the top it regains it's 'wealth' status.

Welcome to the First Church of Freemarketology, folks.

PS: I'd love to see imstellar do a sequel where the same kids open up a social security stand.

*promote *money *talks

Promoting this Sift Talk post - promote requested by dystopianfuturetoday.

Adding post to channels (Talks) - requested by dystopianfuturetoday.

As you were, siftbot.

dft, that was awesome.

freemarketeers have adopted an extremist position which fails like all extremist positions, including communism, anarchism and fascism.

extremists normally think they are thinkers, but if they really thought about it they would realise it just isn't that simple, sorry, no, you haven't solved the problems of the universe with a story about lemonade.

Well I showed up and DFT said everything I was going to say.

I always knew he was a communist. I will see you at the next communist party meeting where we will drink vodka and burn copies of Ayn Rand books. It be fun timings.

There are various kinds of goods:
http://en.wikipedia.org/wiki/Good_(economics)

>> ^imstellar28:
Wealth is capital.


Really?

It's not health? Safety? Opportunity? Fairness?

It's not equal access? It's not ease of travel?

Food for the hungry? Homes for the homeless?

A sustainable economy, ecology, and sources of power?

A fair retirement?

As usual, you did a "stellar" job of repeating almost verbatim almost any chapter out of almost any horseshit rightwing tome crowing about the benefits of capital.

And, with every word, leaving the human, and humane, element absent from the equation.

There's some self-righteous bullshit flying around here!

Wealth is not "food for the hungry". Wealth itself has no regard for the "humane". That's a completely different topic.

Another point: Money in the bank is not stagnant! It earns interest for the account holder, and the bank can lend it out to earn some profit themselves, and the people who borrow it can use it for a multitude of purposes. It's still a vital part of the economy. If everybody spends their money rather than saving it we may have an economic boost, but we will have a nation of people on the verge of bankruptcy, which is never a good thing in the long run.

And it's certainly not a way to build wealth.

幹

In all this self-righteousness, my own included, I think I'm still really left wanting for an explanation of what the reasoning is behind this oft-repeated cliche is.

I truly find no basis for it that isn't based in gross misdirection.

If all government does is move wealth around, never creating it, why do bankers create wealth? They're using someone else's money, investing it in something they unilaterally choose, and do so primarily for their own selfish gain, rather than for the benefit of society.

The main reasons I hear for this boil down to "because they're risking their own money" which isn't true, and "because they're earning profits" which is true, but I don't believe that wealth can only be created when profits are being extracted.

This isn't to say I disagree with the idea that bankers are providing value to society, I just don't understand why government isn't providing value in the same way.

I don't understand why conservatives believe this, and I'm seriously trying to understand.

You can't sway a christian to atheism with a simple explanation for why there probably is no god, all you can do is plant a seed of doubt in his mind. What he does with it, is up to him.

^ If you're referring to us as the Christians, let me assure you, you have not yet planted a seed of doubt.

I welcome you to make another attempt, though.

christian: reads a book and believes it and tells people about it

atheist: reads loads of books and has no idea what the fuck to believe any more because it all sounds so baseless when you realise there's multiple simultaneous points of view in the world and no higher authority to reveal the right one

you choose, imstellar.

I like to debate when it is fun or when I can learn something or advance my understanding of an issue. Sometimes simply explaining your position to someone else can really help with your own understanding.

Walking into a evangelical church on Sunday morning and opening a dialogue about the existence of god isn't going to be very fun or enlightening, its just going to get a bunch of people riled up and get you told to go to hell.


>> ^NetRunner:
^ If you're referring to us as the Christians, let me assure you, you have not yet planted a seed of doubt.
I welcome you to make another attempt, though.

^ When a priest in this increasingly hypothetical evangelical church throws open the doors and calls for nonbelievers to come in and explain why they're right, and you walk in, don't be surprised with what you get.

Think of me as one of those people who asks Richard Dawkins "what if you're wrong?" expecting him to be able to give an answer that's going to be relevant in their framework for understanding the world, rather than just one that will make sense to his own kind.

I'm not impugning capitalism's virtues, I'm just saying this oft-repeated phrase seems patently silly.

If wealth is money, government issues it.

If wealth is defined as assets minus liabilities, the question of "creating wealth" becomes quite silly since wealth's definition is an accounting term synonymous with "inflation-adjusted net worth", not something tangible.

If wealth is just an accounting term, every time government runs a budget surplus it's "creating" wealth, or at least moving its net worth in the positive direction.

If wealth is capital, as you say, it's not so much a matter of government not being able to create wealth, it's more a matter of how you measure it. If government builds an interstate highway, and hundreds of shipping companies spring into existence, make tons of money (after tax), and government pays off the cost of building the highways and then some, did government create wealth?

I know the Austrian answer: What those who would make this argument fail to see is that this highway choked off all the other possible things the private industry could have done and should have done, because government did this by taking money from private industry.

How is this different from if an exceptionally rich banker did the same thing? The answer Austrians give: because government didn't earn the money, therefore it must mismanage it.

In other words, because government is based on theft, government is always incompetent, and that's because it's not doing this for selfish profit -- if it were, it would be an infinitely better steward of resources. Hey, that sounds like Objectivism, or at least some amateur psychology.

How is that science, and not faith, when those are the underlying assumptions behind the theory that directly lead to the conclusion?

^NetRunner,

If you are honestly interested in learning a different perspective, then we can talk it through. As a disclaimer, you aren't going to learn as much if you've already made up your mind before we even start a discussion.

When solving a problem, one invariably has to make assumptions. The problem is what assumptions need to be made? Economic theory is valuable when it can make accurate predictions. If it cannot make accurate predictions it is not very useful. A robust economic theory should explain all situations -- especially simple ones like my lemonade example.

Let me respond to your points so we can continue the discussion.

You said "In my mind, you're forgetting the sidewalk the kids built their stand next to, that makes their enterprise possible. That's part of what that tax money is for."

That is a valid assumption, but doesn't it just add an extra layer of complexity? Sure, we can include it in an analysis, but shouldn't a good theory be able to make accurate predictions without that assumption?

You said "Can you deny that the Interstate Highway program created wealth? Incentives for a transcontinental railroad spurred growth? Trust busting of the oil and rail companies in the early 20th century restored competition? The invention of the internet?

To answer those questions we first have to know and understand what wealth is. You are asking here the definition of wealth. To ask what creates it without knowing what it is would be putting the horse in front of the cart.

Why don't we focus on that first, as I still think there is some confusion

Here are some definitions of wealth:

"the annual produce of the land and labour of the society"
"anything that has utility and is capable of being appropriated or exchanged."
"rich or valuable contents or produce"

Essentially, wealth is a measure of the value or utility of an object. Essentially, all objects are valuable (given the correct knowledge) so when you think of wealth, you should just think of "tangible goods." For example, bread, milk, cars, houses, land, cows, computers, metals, factories, paper, roads, etc. Money is different because it is an object that can be exchanged for something else more valuable than what it is itself. This is not a problem, but if you really want to understand what wealth is, try to ignore money for the time being.

Wealth is created when the value or utility of objects are increased. This is done only by physical labor. New ideas or inventions can be used to find new ways of creating value with labor, but ideas alone do not create wealth. For example, wealth is created when a farmer sows a lemon seed and grows a lemon tree, and again when he picks a bushel of lemons, and once more when his children make lemonade. In each step, wealth was only created by physical labor. The lemons did not arrange themselves into bushels, nor squeeze themselves into glasses. Lemons cannot create wealth because lemons cannot perform labor.

So now that we have defined wealth, I will attempt to answer some of your questions. Let me preface this by saying that the answers to these questions should not depend on ideological affiliation. I am going to be strict in my answers because that is what science requires.

1. "Can you deny that the Interstate Highway program created wealth."
The highway program undoubtedly created wealth because people where hired to perform labor: they built roads. However, in the context of this question what you are really asking is, was more wealth created with this money than would have been created in the hands of individuals? I will come back to this, but for now it is important to remember that wealth can be measured in all items, not just roads.

2. "Railroad spurred growth?"
A railroad is wealth. Wealth can most certainly be used to fuel growth. Another example is food.

3. "Trust busting of the oil and rail companies in the early 20th century restored competition?"
I don't think this is pertinent here so I'll save it for another time, if you don't mind.

4. "The invention of the internet?"
An invention is an idea which provides a new way to use existing materials. It is a new plan for labor. The idea of the internet can be used to create wealth, but it does not in and of itself create wealth. Another example is the invention of fire. The idea of "fire" gave a new plan for labor: rubbing sticks together, but the idea of fire itself is not enough to create a flame. Someone must actually perform the labor to create fire, which is wealth.

6. "NASA, The space race and all the discoveries they've brought about?"
Nasa is a group of people who in part, physically build space ships which are wealth. They are performing labor, so NASA does in fact create wealth. As with the interstate program, the context in which you ask this is, was more wealth created with this money that would have been created in the hands of individuals?

8. "the much maligned public education system?"
Teachers perform labor when they impart knowledge to students. Ideas alone are not wealth, as they do not alter the value of existing materials until they physical manifest themselves in the form of work. However, if one views a person as an object, then a person may be considered "more valuable" if they have greater knowledge, for example. Educators can be said to create wealth, but only in this abstract way--as ideas do not have real utility until they manifest themselves as work.

9. "national healthcare systems seem to play a similar role in optimizing their human resources."
Doctors create wealth because the body is an object which has value. For example, a broken leg may be of less value than a functional leg, so when a doctor performs work (setting the bone, creating a cast) he is doing work to increase the value of the leg--he is creating wealth.

If we are on the same page about what wealth is and how is created, we can try to answer the question "can the government create wealth?" As I alluded to in #1, the question is, technically, "can labor in the hands of the government create greater wealth than labor in the hands of individuals?" If we are not on the same page, and there is still confusion or contention, lets get that out of the way first.

^ I think we're on the same page, and ultimately I think you just said you agree with my overall point -- the statement "government can't create wealth" is false.

The question you raise is "can labor in the hands of the government create greater wealth than labor in the hands of individuals?" which is fair and valid, and I'd agree that most of the time, government cannot do it better. I just don't agree with people who assert that it never can spend money that results in benefit greater than the sum of dollars spent, whether that's wealth or something more abstract.

I'm always interested in other perspectives, and while I most certainly have an existing viewpoint, I'm open to changing my mind on things if someone gives me a good reason to do so. I figure it's good to invite people to make good-natured attempts to tear down what I believe, just to make sure it stands up to scrutiny.

However, I find that holding the average Republican talking point up to the light pretty much always makes them shrivel into worthless nonsense. There's a difference between "Government should not try to do X because we think Y would be better" and "Government is incapable of doing X". The former is the statement of a viewpoint, the second is a false declaration that, if true, would vindicate their unstated viewpoint.

Same goes with Michael Steele's asserting that government can't create jobs (and worse, says never in the history of mankind has it ever done so) -- what I think he wants to say is that government can't create permanent private sector demand for employment through temporary government spending. That would be the start of a valid debate, but it's not what he's actually saying.

My main concern is that there seem to be people who don't know any better who think these misleading statements are directly true; they think government can't create wealth, and government can't create jobs.

I don't think that's being honest, and I hope you would agree with me.

MINK,

Boys make lemonade. Government takes small percentage. Government buys paint for artist down the road. Artist makes painting with a markup of 3000%. Lemonade stand starts to look like a waste of time.

How about this instead, "Boys make lemonade. One of the boys breaks off to pursue Art career with his percentage of profit. He makes 3000% mark up on first painting. Lemonade stand starts to look like a waste of time."

I don't think the force of government was necessary.

NetRunner,

I'm not comfortable stating that the government can create wealth, or its inverse, because like the statement "the government can't create jobs" it leaves too much to interpretation. I would suggest jettisoning these altogether for more precise terms. It is true that governmental employees perform labor when they build roads or provide healthcare, which could be interpreted as the government creating wealth; but I don't think it is a terribly useful hypothesis. Individuals create wealth, and government employees are individuals, so naturally government employees create wealth.

If we look at it from a scientific perspective, the statement:

"labor in the hands of the government creates greater wealth than labor in the hands of individuals"

is a hypothesis which makes a prediction. To test it, we would have to perform a scientific experiment with a control. If the experiment demonstrated that the prediction was accurate, then we would be confident in its claims. What type of experiments could we utilize to do so? I'm not saying it is impossible to test this hypothesis but I think we can agree that it would be exceedingly difficult. There may be many related hypothesis, such as "the central management of resources can increase the efficiency of operation" which is easier to test and may lend credence to its theoretical underpinnings, but I do not think the above hypothesis is testable at the present.

Economics is useful only because the predictions it makes can be used to improve our lives.

As a footnote, I think it is important to state your goal when choosing a hypothesis. If you are measuring the drop of ball, fluid dynamics will not be very useful. I also think it is easy to get carried away with the scope of economics when mixing it with politics. Economics, as much as physics, has no place in politics. When people are talking about building roads, I think the relevant hypothesis is not the above, but rather this:

“the government, through the allocation of funds, can divert resources to specific sectors”

This hypothesis is readily testable and makes very accurate predictions. Because of this, it can be used to improve our lives. For example, if the goal is to create wealth in the form of roads we can use this hypothesis to accurately increase our measure of roads by allocating funds for their creation.

So, to bring it back, in what ways can we use the hypothesis: "labor in the hands of the government creates greater wealth than labor in the hands of individuals" to improve our lives, if such a hypothesis is untested, or even untestable, at the present?

You haven't explained wealth, steller.

You've described ownership.

Ahh, now I think we're getting somewhere. You misunderstand my position if you think my hypothesis is that government generally creates greater wealth than individuals as a general rule.

My general rule is that the free market does the wealth creation business better. My issue is, it doesn't seem to do much about solving some of society's largest problems, because they seem intractable, or at least less profitable than blending bacon and mayonnaise and selling it as Baconnaise.

My way of looking at politics isn't driven by economics, it's driven by a sense of empathy.

In this case, we're talking about the stimulus and this depression, I suppose. My chief concern isn't maximizing the amount of wealth we generate over the next ten years, it's minimizing the amount of suffering experienced in the next ten years.

I'm not sure what Austrians say as a perscription to fix unemployment -- I'm guessing they say don't "do" anything, it'll fix itself. Okay, but how many people will lose their homes? How many will go without healthcare? How many will lose their retirement?

If government action can drive down those numbers in the short term, in exchange for a little less prosperity in the future, I don't see why we wouldn't do it, especially if the people losing a little prosperity have some to spare.

Along the way, government is planning on building infrastructure that is, for the most part, nonrival (they benefit everyone) and nonexcludable (there’s no way to restrict the benefits to people who pay). Ya know, like the volcano monitoring Bobby Jindal complained about.

Most of what won't fall in that category will be aimed at the people who would suffer most, those who are already unemployed, receiving social security, receive Medicaid coverage, or some other form of government assistance.

Sounds like a perscription for softening the blow.

That's the standard I'm judging things by, and while that's not necessarily creating "wealth" per se, I believe it has value that everyone should appreciate.

If you believe the New Keynesians and even some Chicago School economists, it might even rekindle some private sector investment, though really I don't expect we'll have any recovery until Obama and Geitner decide what to do with the zombie banks, since that's where our breakdown really is.

^I'd like to have a discussion about that as well, perhaps in another sift talk. So, at this place in our discussion, where are we at in terms of your two original questions,

"what is wealth" and "why can't government create more of it" ?

more to the point... who cares about "wealth" if they aren't happy? what percentage of GDP actually increased happiness?

aaaaaand... we're back to philosophy, arts, opinions, conjecture, psychology.

>> ^cdominus:
MINK,
Boys make lemonade. Government takes small percentage. Government buys paint for artist down the road. Artist makes painting with a markup of 3000%. Lemonade stand starts to look like a waste of time.
How about this instead, "Boys make lemonade. One of the boys breaks off to pursue Art career with his percentage of profit. He makes 3000% mark up on first painting. Lemonade stand starts to look like a waste of time."
I don't think the force of government was necessary.



The problem with your distortion of my crap example is that you completely misunderstand the source and motivation of art.

The economists solution is to make copyright laws that try to give an artist some kind of mechanism to monetize his work... but i think if you do a survey among artists about copyright laws you will find some interesting, confusing, and puzzling responses.