Explaining Wealth

via Cafe Hayek, I stumbled across this great Paul Graham essay:

A surprising number of people retain from childhood the idea that there is a fixed amount of wealth in the world. There is, in any normal family, a fixed amount of money at any moment. But that's not the same thing...I can remember believing, as a child, that if a few rich people had all the money, it left less for everyone else. Many people seem to continue to believe something like this well into adulthood...

What leads people astray here is the abstraction of money. Money is not wealth. It's just something we use to move wealth around. So although there may be, in certain specific moments (like your family, this month) a fixed amount of money available to trade with other people for things you want, there is not a fixed amount of wealth in the world. You can make more wealth. Wealth has been getting created and destroyed (but on balance, created) for all of human history.

Suppose you own a beat-up old car. Instead of sitting on your butt next summer, you could spend the time restoring your car to pristine condition. In doing so you create wealth. The world is-- and you specifically are-- one pristine old car the richer. And not just in some metaphorical way. If you sell your car, you'll get more for it.

In restoring your old car you have made yourself richer. You haven't made anyone else poorer. So there is obviously not a fixed pie. And in fact, when you look at it this way, you wonder why anyone would think there was...

He also talks about how programmers, who directly create wealth by writing code, tend to be more libertarian (like other craftsmen). I've been delighted during the past decade by the influx of wealth into the tribe of computer nerds, since I identify with that group. If it also results in wealth for libertarians - so much the better.

What a Job Is

In industrialized countries, people belong to one institution or another at least until their twenties. After all those years you get used to the idea of belonging to a group of people who all get up in the morning, go to some set of buildings, and do things that they do not, ordinarily, enjoy doing. Belonging to such a group becomes part of your identity: name, age, role, institution. If you have to introduce yourself, or someone else describes you, it will be as something like, John Smith, age 10, a student at such and such elementary school, or John Smith, age 20, a student at such and such college.

When John Smith finishes school he is expected to get a job. And what getting a job seems to mean is joining another institution. Superficially it's a lot like college. You pick the companies you want to work for and apply to join them. If one likes you, you become a member of this new group. You get up in the morning and go to a new set of buildings, and do things that you do not, ordinarily, enjoy doing. There are a few differences: life is not as much fun, and you get paid, instead of paying, as you did in college. But the similarities feel greater than the differences. John Smith is now John Smith, 22, a software developer at such and such corporation.

In fact John Smith's life has changed more than he realizes. Socially, a company looks much like college, but the deeper you go into the underlying reality, the more different it gets. What a company does, and has to do if it wants to continue to exist, is earn money. And the way most companies make money is by creating wealth...And that's what you do, as well, when you go to work for a company...

Someone graduating from college thinks, and is told, that he needs to get a job, as if the important thing were becoming a member of an institution. A more direct way to put it would be: you need to start doing something people want. You don't need to join a company to do that. All a company is is a group of people working together to do something people want. It's doing something people want that matters, not joining the group.

That last bit is an important one that I wish colleges prepared people better for. You aren't being paid because the company likes to give jobs to people with degrees from good schools, or who wear nice suits, or because you're getting a share of largesse stolen from the world[1]. You are being paid because you can create more value than you cost to hire.

This is an enormously wonderful, optimistic, liberating thing. You need not feel guilty about your salary, no matter how high - for you are giving the world more than you get. Spend it on whatever you like - for it is merely a portion of the wealth you created, which would not have existed without your labor. Feel free to take some of the wealth you create and use it to have and raise as many kids as you like - they will reward the world many times over, by producing more than they consume[2].

fn1. Unless you work for the government.

fn2. Unless they work for the government.

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Paul Graham is super. You'd

Paul Graham is super. You'd also like his essay on inequality and risk.

The Tragedy of Childhood So

The Tragedy of Childhood
So my point is this: childhood is the enemy of a civilized society.

You are being paid because

You are being paid because you can create more value than you cost to hire.

It seems like a statist would just respond that government workers too create more value than they cost to be hired, else they wouldn't be hired.

Government's money comes,

Government's money comes, with vanishingly small exceptions, from taking it from other people. Notwithstanding the usual curses of the knowledge problem, calculation problems, and public choice problems on government action and spending, said spending is usually on either things that people would not choose freely to produce (a negative sum transaction), things that are uneconomical to produce freely (and thus taken up by government- another negative sum), and very rarely on public goods for which there currently is little or no private effort made to supply (this can be positive sum, sometimes, but rarely isn't).

So, for the public good case, you usually get a negative sum there as well simply because there is not enough knowledge available, nor ability to actually figure out what should be done (or how to do it efficiently), nor incentive to do it well- in fact, it usually faces incentives *to* waste money.

For most welfarists the negative sum nature of government is accepted as a trade off for the preferred outcomes but usually have more intellectual integrity than to suggest that it is truly a wealth generating enterprise.

"You don’t need to join a

"You don’t need to join a company to do that. All a company is is a group of people working together to do something people want. It’s doing something people want that matters, not joining the group."

Well sure, but if you just look to solve your problems as an individual you miss out on all the policy wonkery and political activism.

I can not help getting the

I can not help getting the feeling that there is something fundamentally wrong in this argument. It has something to do with the opening premise of the childhood idea of a fixed amount of wealth in the world.

Paul Graham's approach, Patri, sidesteps the real definition of "wealth" - the ownership of scarce and "non-renewable resources" - and confines the argument to what I would term "the exchange of wealth" - value given and received for economic goods that do NOT comprise a "scarce resource".

To illustrate...

If I own a block of land that has a current value of $1m, am I more wealthy or less than the person who has developed a "code" that is capable of replication many times over and at this time may be sold for, let us say, $10,000 per time. It may be that it returns only $50,000 a year in actual income.

If I retain the ownership of my land, there will be more and more people wanting to buy land like it, with demand pressing the value of my land higher all the time. The crux is that my land is irreplaceable and can only be "manufactured" with difficulty.

The developer of the "code" on the other hand faces the prospect (at some point) of his "asset" losing value as it is supplanted by more advanced, similar products. It is OK to use Bill Gates here as an example here if you want just so long as you remember that quite apart from his "product" he has successfully engineered himself a "virtual" monopoly.

Graham's approach is great for those whose idea of wealth is a small patch by Central Park some 15 stories up, several large and exclusive and expensive motorcars, and several millions invested on Wall St. But, as 1929 and 1932 showed, that kind of wealth can be all too transitory, illusory even. The people who came out of the Great Depression the best were largely those who held physical assets and resources; land, oil, ores, manufacturing plant and transport resources, and the skills and knowledge needed in rebuilding a national economy.

I would think that wealth

I would think that wealth would be defined better as goods produced that have a useful value to their owners.

For most welfarists the

For most welfarists the negative sum nature of government is accepted as a trade off for the preferred outcomes but usually have more intellectual integrity than to suggest that it is truly a wealth generating enterprise.

Actually I had in mind efforts by government to fund universities and pharmaceutical research when I made the post. So you're basically saying the proper response isn't to suggest that such efforts never produce wealth (like new technology, new science, new mathematics, etc), but that they do so inefficiently and sporadically compared to an actual market even when they are positive sum?

I think probligo and Stephan

I think probligo and Stephan are wrong. Wealth is anything that has value to the barer or is valuable to someone else so that the bearer could trade it for something they valued. It includes not just goods, but ideas, songs, jokes, art, philosophy anything a person wants. Even thoughts and memories are wealth because they have value. You wouldn't trade that memory of the trip you took to the beach with your family for a dollar would you? Techniques, ideas, and thoughts are valuable (and thus a form of wealth) as a copper mine.
I don't understand Probligo's post. How can an "economic good" which we exchange "wealth" for not be wealth itself? Just because some forms of wealth can gain or lose a lot of value (value's subjective after all) doesn't mean that it is not wealth for who ever desires it or can find somebody who desires it.
Can probligo explain why he disagrees with Patri's definition of wealth or if he is just positing a different (and weird) definition of it?

Clearly, probligo is

Clearly, probligo is confusing wealth with tangible property.

Darrington, either you

Darrington, either you misinterpreted me or I was unclear; Your definition of wealth is identical to mine, just more elaborative. Wealth is not merely tangible goods, or scarce physical resources. It is whatever is of value to its owner and any other willing bearers of it. This could include all sorts of things: Gold, oil, program code, paintings, a waste management plant, medical technology, etc.. I once read Cryptonomicon by Neal Stephenson; in that book one of his characters states something that really brings across the real definition of wealth: In referrence to a gigantic stash of gold that some other characters wish to recover, this particular character, a business man, states that Gold is the graveyard of wealth, that real wealth is found in the ingenuity and hard work of the people of his country (Japan). Japan also happens to be a good example of the real meaning of wealth.

Look at it this way... If

Look at it this way...

If you own a Ford GT40 or Ferrari, and I own the last 1,000 barrels of oil, who has the greater wealth?

If you write the world's greatest pop song or novel, and no one can afford to buy it, what is it worth?

:wall:

As I said before, the "wealth" of this planet is in its non-renewable resources. Owning a slice of that is true wealth. Everything else has a nett zero value. All that you are doing is transferring money from one pocket to another... As was seen in Germany in the 1930's, money wealth can vanish in the night.

Stefan, Yes. You can also go

Stefan,

Yes. You can also go the route of saying since the initial taking violates personal preference then who knows what the unseen value of the money would have been as opposed to what positive is gained and seen (ala all of the spinoffs from the Apollo Program, for example). I don't think this is particularly convincing of an objection (seems a bit too abstract and idealized) but the kernel is true; taking away people's justly derived wealth for other purposes is a cost, and there is a deadweight loss involved in ferrying those resources from people who earned then and would have employed them immediately to the new, favored group/activity (a rule of thumb being, at the very least, the forgone interest income that money/asset equivalent would have generated on the money market during the time it takes to seize the asset and when it is employed for a purpose other than maintaining the apparatus of taxation).

Probligo- A. It is

Probligo-

A. It is impossible to say, given that we don't know what subjective ends either individual has for their goods.

B. If I make the worlds greatest pop song, I'm going to be very popular at parties, regardless of whether I can make money off of "selling" the song to people. If I value social prestige, or, say, getting laid more than $0.05 per play of my song, then even in a world of penniless college students I'm pretty wealthy.

It would seem that you have a rather strange conception of what wealth is.

You can also go the route of

You can also go the route of saying since the initial taking violates personal preference then who knows what the unseen value of the money would have been as opposed to what positive is gained and seen (ala all of the spinoffs from the Apollo Program, for example).

Interesting that you bring up Bastiat's analogy; it sounds like then you could go on to argue that if a libertarian values the production of aggregate wealth in society then he must necessarily value holding a non-government job over a government job, even if it's a choice between being a highly-paid public official and a poorly paid private ditch-digger.

Yes, but the pay of a high

Yes, but the pay of a high salaried public official is a net loss on society. The pay of the ditch digger is not. His employer only pay's the digger his wage from funds that came out of revenues from services rendered, or wealth creation.

I merely wanted to point out

I merely wanted to point out the seeming paradox here; for if you value aggregate wealth, then of the two jobs a ditchdigger is better, whereas if you value your own personal wealth then being a high-salaried public official is better. Of course in the real world there are also high-salary private jobs too; maybe a majority of libertarians are not academics like Hoppe, but people from the private sector? I swear to God (or Kaldor-Hicks efficiency, or whatever) that half the columnists on LewRockwell.com are ex-military.

Interesting that you bring

Interesting that you bring up Bastiat’s analogy; it sounds like then you could go on to argue that if a libertarian values the production of aggregate wealth in society then he must necessarily value holding a non-government job over a government job, even if it’s a choice between being a highly-paid public official and a poorly paid private ditch-digger.

Only if you value aggregate wealth so much that the additional wealth you get from a higher-paying job outweighs the drawbacks of the minor decrease in aggregate wealth you cause as a public official. Realistically, no one values only aggregate wealth or only personal wealth. Everyone values each to different extents. And because of the concentrated benefits and dispersed costs, most people would (ethical considerations aside) prefer to take the high-paying job.

Also, you're not taking into account that you can increase aggregate wealth by filling the public official position. You might be able to influence policy in beneficial ways, or at least refrain from doing the damage that a less liberal candidate would have. And I think libertarian academics, even at public universities, do good by using the state's own resources to delegitimize it.

In any case, I don't see the paradox.

For the record, I'm private-sector and not exactly living paycheck-to-paycheck, and this is true of most of the libertarians I know. Of course, I work at a software company, so there's probably some selection bias there.

Excellent article. Spot on

Excellent article. Spot on for sure.