Friday, February 10, 2012

wealth

Marxists base a lot of their demands for social justice on the idea that there is just a limited pool of wealth that everyone fights over. But this idea is wrong. Wealth expands as people expend effort and create organization and goods.

After a factory makes a car, there is a new bit of wealth in the world: the car. The car is something that people want. Similarly, after someone makes a bar of soap or a pizza or a washing machine, there is new wealth in the world. The same is true when someone delivers the pizza to your house. He took a pizza that was of little value to you because it was far away, and he brought it to your door and handed it to you, greatly increasing the value of that pizza to you and thereby slightly increasing the total wealth of the economy. That’s why he gets paid: he takes low-value pizzas and turns them into high-value pizzas. The money that he gets is extracted from the difference in the low and the high value.

Manufacturers are similar to pizza-delivery guys. They take raw materials and create something that people value more than they valued the raw materials. Soap makers take low-value chemicals and perfumes and mix them together to make a product that will leave you feeling fresh as an Irish spring. That soap product is more valuable to people than the raw chemicals were, so new wealth has been created. The soap makers, like the pizza-delivery guy, get their profit from that difference between the value of the raw materials and the value of the finished product. They create new wealth and then take out a slice of it for their trouble.

But notice that everyone is better off: the guys who owned the chemicals are better off because they valued the money that was paid for the chemicals more than they valued the chemicals. The customer is better off because she values smelling Irish more than she valued the money that she paid for the soap. The manufacturer is better off because he valued the profit that he made more than he valued the time that he had to put in to make the profit. And the employees of the manufacturer are better off because they value their wages more than they value the time that they had to put in to make the wages.

This is the key of free-market trading, the reason that free economies always outstrip planned economies and the factor that Marxist economic theories miss: every free trade increases the wealth of both parties to the trade! The very fact that the trade was freely made shows that both parties to the trade value what they got more than what they gave up. Since both parties to a free trade are wealthier and no one became less wealthy, every free trade increases the overall wealth of society.

The same is not true in planned economies. In a planned economy, you go to work because you have been assigned a job by the Central Planning Committee. You don't do the job because you freely decide that the time you spend is of less value to you than the money you receive; you do the job to avoid punishment. This is genuine coercion (as opposed the the fake coercion and “exploitation” that Marxists are always talking about, which involves people just not having the choices that they would like to have). In a Central Planning economy, many of the transactions do not increase the overall wealth of society because the transactions are coerced, and so one or both of the people involved in the transaction is not better off and the wealth of society may actually decline as a result of the transaction.

Wealth is just “what people want”. It is nothing else. The only way to ensure that the wealth of a society increases is to let the members of the society chose their own transactions based on what they want. There is no other way known to ensure that the transactions actually give people what they want.

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