pacomartin
pacomartin
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May 1st, 2011 at 10:01:53 AM permalink
Quote: Doc

In a related thread almost a year ago, I made a post describing my opinion that it is very important for our economy to re-emphasize creation of wealth by producing actual products (products which have more intrinsic value than the resources consumed) rather than just exchanging wealth inefficiently by providing services. There was strong disagreement with my position, but I still hold to it. Some of the follow-up posts directly relate to the discussions in this thread.



Growing up an industrial city I am very familiar with this argument. It was often emphasized in the phrase We can't all make a living flipping burgers for each other.

Economists have partly gotten used to changing the traditional names
agriculture, fishing, and extraction such as mining has now become primary sector
manufacturing has become secondary sector
service sector or the service industry has become the tertiary sector of the economy
production of information is sometimes called the quaternary sector of the economy

The lightning rise of countries such as Iceland, Ireland, and Norway which largely skipped the manufacturing industrial revolution seemed to confirm that full scale tertiary development could make you ultra wealthy. My friends used to say that Ireland (by which they mean the Republic) had nothing to clean up.
But in the case of Iceland and Ireland they seem now to be confirming the old rule that the faster you rise, the faster you fall.

Still 30% of the world's GDP is in the industrial (secondary sector) while only 5.7% is in the primary sector. The following countries have a larger percentage of their country's economy in the industrial sector than the world. Listed in order they are:

Saudi Arabia , United Arab Emirates , China, Indonesia, Iran, Thailand, Norway, South Korea, Colombia, Venezuela Russia , Mexico, Poland, Argentina, South Africa, Taiwan

Clearly oil production and processing is a big part of that list.

India and Indonesia are the world's highest percentage of economy in the primary sector.

Clearly China is trying to produce goods, then use the money to purchase the natural resources of the world.
Doc
Doc
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May 1st, 2011 at 1:22:29 PM permalink
Quote: AZDuffman

I'd like to see more things still made here, but it will not take us back to the 1950s where so many people worked in factrories. ... The higher value products have been automated and the low-value ones cannot be produced at a price Americans are willing to pay. ...


The general concept of "factories" probably needs to evolve a bit. The word doesn't have to imply "sweatshops." I see nothing wrong with people working to automate facilities making high-value products here in the USA. If a product genuinely has low value, then its manufacture likely did not create much new wealth.

I just see no reason for our economy to be based on non-creative services while others (e.g., China) manufacture, create wealth, and develop the stronger national economy. I suspect that it is feasible to have high-volume electronics manufacturing conducted in factories here, rather than in Asia. With high automation characteristic of such operations, the labor price difference should be something that could be overcome, considering the added transportation costs to the market in the US. Even Asian automobile companies have found it cost effective to assembe some of their products in the US. Why should US companies export the creative processes and leave much of the new wealth overseas?
AZDuffman
AZDuffman
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May 1st, 2011 at 2:00:29 PM permalink
Quote: Doc

The general concept of "factories" probably needs to evolve a bit. The word doesn't have to imply "sweatshops." I see nothing wrong with people working to automate facilities making high-value products here in the USA. If a product genuinely has low value, then its manufacture likely did not create much new wealth.

I just see no reason for our economy to be based on non-creative services while others (e.g., China) manufacture, create wealth, and develop the stronger national economy.



Here is a question for thought. Why do we hear "We can't have an economy flipping burgers for each other," but do not hear, "We can't have an economy making TV sets for each other?"

I grew up hearing the former, but analyze it. What is the real difference? Both support a long supply chain. Over the life of the TV I will spend more in burgers. (or any other kind of food, burgers just being the term.) Burgers provide physical nourishment, the TV entertainment and information. Either way, wealth is created.

Am I correct?
All animals are equal, but some are more equal than others
Doc
Doc
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May 1st, 2011 at 6:22:58 PM permalink
Quote: AZDuffman

Here is a question for thought. Why do we hear "We can't have an economy flipping burgers for each other," but do not hear, "We can't have an economy making TV sets for each other?"


Using my terminology from before, the wealth creation in the burger process is in raising the beef, not in flipping the burgers. We couldn't all be farmers, but if a lot of us were and we raised food for each other, that would be OK. I think that at present, the US agriculture business is able to produce more than the country needs (except for seasonal or regional items that we import from other parts of the world), so we export a significant amount of what we produce. That's good, too. But if we both have a supply of burger patties, and I fry them for you while you fry them for me, then there is no wealth created, and probably no real benefit either.

If you manufacture TVs for me and I do for you (and both of us for others), we might both be creating wealth for society. More likely, you could manufacture TVs and stereos while I manufactured laptop computers, and we could be each other's customer. We just need to actually be doing the manufacturing, rather than me selling Sony stock to you and you selling Toshiba stock to me and each of us selling the shares back to the other the following week, calling that an active economy.
AZDuffman
AZDuffman
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May 1st, 2011 at 6:55:46 PM permalink
Quote: Doc

Using my terminology from before, the wealth creation in the burger process is in raising the beef, not in flipping the burgers. We couldn't all be farmers, but if a lot of us were and we raised food for each other, that would be OK. I think that at present, the US agriculture business is able to produce more than the country needs (except for seasonal or regional items that we import from other parts of the world), so we export a significant amount of what we produce. That's good, too. But if we both have a supply of burger patties, and I fry them for you while you fry them for me, then there is no wealth created, and probably no real benefit either.

If you manufacture TVs for me and I do for you (and both of us for others), we might both be creating wealth for society. More likely, you could manufacture TVs and stereos while I manufactured laptop computers, and we could be each other's customer. We just need to actually be doing the manufacturing, rather than me selling Sony stock to you and you selling Toshiba stock to me and each of us selling the shares back to the other the following week, calling that an active economy.



This is an interesting and non-ideologcal, I hope you would like to continue.

My thing is tangible vs intangible and why you say only one creates wealth. Lets use the "burger" example but be more realistic. In the real world it isn't "you fry them for me and I fry them for you." In a real society, say you own a burger joint. I own a pest control company. Another person owns a linen service. And there is a farmer. For simplicity we will assume the farmer provides all the foodstuffs you use. So the farmer shipe you a truckload of food. But you must have a sanitary restaurant so you hire me. You need linens so you hire the linen guy. We come in and do the work. But it doesn't end there. The linen guy and myself needed gasoline to drive to your restaurant. And you needed electricity to run the place. The electricity was generated from natural gas from a well on the farmer's land (he is a lucky guy!) Because he does so well he buys food at your restaurant; uses my services to control the flies in his dairy barn; and has the linen guy provide work clothes laundry for his people. We have provided wealth for everybody yet not manufacturered a thing other than the food.

It is more complicated, but aren't all the intangibles improving everybody's life?
All animals are equal, but some are more equal than others
pacomartin
pacomartin
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May 1st, 2011 at 7:58:14 PM permalink
Quote: Doc

Using my terminology from before, the wealth creation in the burger process is in raising the beef, not in flipping the burgers. We couldn't all be farmers, but if a lot of us were and we raised food for each other, that would be OK.



When Iceland's banks had a net loss several times the GDP of the entire country, a lot of people lamented that the country had abandoned it's traditional economy of high end food production from fishing.

There are many precedents throughout history. Another phrase that you may have heard is money makes you poor. It's in reference to society's like Seville Spain, which was the primary beneficiary of the fortunes being shipped home from the New World. If you visit the city, you get an idea how much was built in a comparatively few years when the gold arrived. As one contemporary of the period said "The world will think us mad". He was talking a bout the huge building projects behind the cathedral and many other buildings.

The demand side of the economy is very real. Meeting demand in 1998 was the salvation of many broken Asian economies. However it fed our appetite for imports. Besides food there is furniture, oil, clothes, and all kinds of everyday products.

In the year 2000 no $100 banknotes were produced since so many had been made in anticipation of a Y2K catastrophe. The overwhelming amount of $100 banknotes circulate overseas. Usually notes of that denomination last over 7 years and are removed. Clearly none of the ones before 1996 without the large portraits are still in circulation since people would widely distrust them by now.

For the 11 years prior to 1991, the production of the $100 banknote averaged $115 billion per year. After that point production soared, and it went hand in hand with the Trade Deficit explosion.


Trade Deficit (year) Production of $100 banknotes in billions
$66 ( 1991 ) $957 <---- fall of the Soviet Union
$91 ( 1992 ) $218
$116 ( 1993 ) $323
$151 ( 1994 ) $605
$159 ( 1995 ) $595
$170 ( 1996 ) $1,251 <----- new design
$181 ( 1997 ) $650
$230 ( 1998 ) $765
$329 ( 1999 ) $1,542 <----- Y2K fears
$436 ( 2000 ) $-
$412 ( 2001 ) $202
$468 ( 2002 ) $605
$532 ( 2003 ) $854
$655 ( 2004 ) $515
$772 ( 2005 ) $669
$828 ( 2006 ) $950
$809 ( 2007 ) $1,088
$816 ( 2008 ) $1,210
$504 ( 2009 ) $1,786 <----- new design
$634 ( 2010 ) $1,907

$100 billion dollars in $100 bills weight 1,000 metric tonnes.

Production in 2009 and 2010 is driven by the desire to replace the old notes with the better one. But production of 2006-2008 was still very high.
thecesspit
thecesspit
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May 1st, 2011 at 9:20:12 PM permalink
Quote: AZDuffman

This is an interesting and non-ideologcal, I hope you would like to continue.

My thing is tangible vs intangible and why you say only one creates wealth. Lets use the "burger" example but be more realistic. In the real world it isn't "you fry them for me and I fry them for you." In a real society, say you own a burger joint. I own a pest control company. Another person owns a linen service. And there is a farmer. For simplicity we will assume the farmer provides all the foodstuffs you use. So the farmer shipe you a truckload of food. But you must have a sanitary restaurant so you hire me. You need linens so you hire the linen guy. We come in and do the work. But it doesn't end there. The linen guy and myself needed gasoline to drive to your restaurant. And you needed electricity to run the place. The electricity was generated from natural gas from a well on the farmer's land (he is a lucky guy!) Because he does so well he buys food at your restaurant; uses my services to control the flies in his dairy barn; and has the linen guy provide work clothes laundry for his people. We have provided wealth for everybody yet not manufacturered a thing other than the food.

It is more complicated, but aren't all the intangibles improving everybody's life?



Is wealth creation normally from the increase of assets not from the increase of consumables? Who in the chain has had their wealth (assets) increased? Once we fry the burgers and eat them (and all the ancillary activities) what actual net assets have increased?

This isn't a rhetorical question, I'm trying to see it for myself.

And actually, does the complete system actually have to have a net wealth increase rather than a steady state of transfer of assets (via money, barter or exchange) around the system so everyone can eat burgers and live well? Do we have to actually increase wealth all the time beyond a certain point? Or is it enough that there is a transfer of wealth at times such that there is a profit motive to drive the free market engine even if it's a zero sum game?
"Then you can admire the real gambler, who has neither eaten, slept, thought nor lived, he has so smarted under the scourge of his martingale, so suffered on the rack of his desire for a coup at trente-et-quarante" - Honore de Balzac, 1829
Doc
Doc
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May 1st, 2011 at 9:30:26 PM permalink
Quote: AZDuffman

This is an interesting and non-ideologcal, I hope you would like to continue.

... We have provided wealth for everybody yet not manufacturered a thing other than the food.

It is more complicated, but aren't all the intangibles improving everybody's life?


Providing wealth to people is quite different from creating wealth. Wealth may be transferred, and if someone is providing a valuable service, then they deserve to receive some wealth in exchange for their contribution. Unfortunately, real-world processes incorporate inefficiencies. In terms of this discussion, the inefficiencies destroy wealth. Unless wealth is created, the overall economic status will decline.

In my simplistic view, creation of wealth requires that the process have an output that has more intrinsic value than the resources that are consumed by the process. Intrinsic value may be unrelated to what someone will pay for something; e.g., I might be willing to pay $150 for a ticket to a Cirque du Soleil show because I find it entertaining and in some way it improves the quality of my life. But that entertainment does not have intrinsic value; I cannot save it and pass the "wealth" along to another. Buying the ticket transfers wealth from me to the circus, and I apparently accept that. But entertaining me, even very well, does not create wealth.

Many other services may be important to us, and valuable enough to us that we are willing to pay for them. But they are quite different from growing a tree, converting it to lumber, and constructing quality furniture from it. Those processes create something of lasting, intrinsic value. If we produce them efficiently, they have greater value than the resources, and we have created wealth.

In the scenario you describe, I think the farmer is probably creating wealth. If "the linen guy" is making the linens, he is probably creating wealth, too. Getting raw petroleum out of the ground and refining it to provide gasoline is another wealth-creating process, but not nearly so much as some believe -- far too often the wealth represented by the petroleum in the ground is discounted. The utility company that takes a lower-value form of energy (chemical energy of coal, gravitational potential of a reservoir, etc.) to produce the higher-value energy form of electricity is also producing wealth -- in another sense, they may also being assisting in the creation of wealth by factories and the farmer by providing a more useful resource. The restaurant chef, the laundry operator, and the pest control company are providing valuable and highly-desired services (perhaps like Cirque du Soleil), but I don't know that I would view them as creating new wealth for society in the same way that I view it for the others.
HKrandom
HKrandom
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May 1st, 2011 at 11:26:34 PM permalink
It is only possible to provide services if there are people out there creating real wealth that want those services. If we were all fishermen living on an island with no tools and only managed to get a fish a day for subsistence no wealth would be created. If I created a net that would let me capture two fishes a day I would be one fish richer every day. If I then exchange my extra fish for a service I only transfer the wealth I created to the person who provides me with the service; only the actual fish is real wealth in this case. It would normally take the other person a whole day to capture the fish and since my opportunity cost is lower due to the net I can exchange my fish for something that takes him less than a day to complete and he can use his extra time to create wealth or offer his service to other people with extra fishes but originally I was the only one who created wealth by getting the extra fish. When someone uses raw material to create something worth more than the value of the material put together, wealth can also be created. If I only had the skills to make a hat per day and someone that makes two hats per day was willing to trade a hat for a fish, we would both be better off since we can create twice as much wealth by specializing in what we do best but the act of exchanging the fish for the hat doesn't create wealth, the wealth was already there and it just changes hand. Correct me if I'm wrong. When companies manage to turn in a profit because subsidies compensate for their losses, wealth is destroyed.
pacomartin
pacomartin
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May 2nd, 2011 at 6:26:27 AM permalink
Quote: HKrandom

If we were all fishermen living on an island with no tools and only managed to get a fish a day for subsistence no wealth would be created. If I created a net that would let me capture two fishes a day I would be one fish richer every day. If I then exchange my extra fish for a service I only transfer the wealth I created to the person who provides me with the service; only the actual fish is real wealth in this case.



Although it is easier to talk about primary sector wealth creation, that is only 6% of the world's gross domestic product today. More difficult questions are what about the contractor who expands a house, fixes the windows, and paints the walls. When financing has now made the house worthless, what is the wealth creation of these activities? What good is your ability to produce automobiles if no one can afford them?

Most of the fortunes made in the last 30 years have been about organization and organizing principles. By that I include most software development and distribution. They are also about creating and then fulfilling needs. Most of the fashion industry, and specialized food from Starbucks to the new revamped McDonalds.

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