On Thu, Jul 24, 2003 at 08:22:29PM -0400, John Pedersen wrote:
>
> >Well, I suppose, if you want to frame it that way. But using that
> >scenario, I don't see that manufacturing a table increases wealth,
> >unless you do send it overseas.
> >
> >But if my dentist takes porcelain, plastic and other raw materials, and
> >makes me a mouth full of crowns, he's brought something into existence
> >that didn't exist before. And if it improves my self-confidence, I may
> >go out and get a better job just because of it. I increased his wealth
> >and he increased my wealth, though not in a global context. And a
> >dentist is really a service provider, not a manufacturer.
>
> (I'll ignore that bit about improving your confidence--you're
> reeeeeaaaaching a bit too far on that one! I don't think any
> economists are doing charts on the productivity factor of nice smiles;-) )
>
> Do the math: you had a thousand dollars and the dentist had some
> porcelain and plastic. He does the work, you give him the thousand
> dollars. Net increase, in wealth: ZERO. (taking the sum total between
> the two of you)
>
Only with accrual accounting. With cash accounting, I lost money on the
deal.
But if you want to look at it that way, any transaction is a net zero. I
pay Pedersen Products $1000 for a table. I get a $1000 table, Pedersen
gets $1000. Net zero.
There are intangibles that have worth as well. I buy an expensive
membership at an expensive country club, which puts me in contact with
all manner of expensive people. Because of this, I'm able to land a
number of deals worth considerably more than the sum I paid for
membership. Equals increase in wealth.
> If you have some lumber, worth $100, and you plane it, fit the
> dovetail joints, sand it, lacquer it--now it's worth $1000. Net
> increase in wealth: $900.
>
Wow, you're leaving out a lot of expenses. You're just talking about
cost of goods. What about labor? What about benefits? Rent? Electricity?
Okay, maybe you're oversimplifying to make a point.
So let's say you spend $800 to make your table and sell it for $1000.
You made $200 profit. Now let's say that the Foster Travel Agency puts
together a number of packages for which it pays $800 (including labor
etc.) and nets $1000. I make $200 profit.
I made the same profit as you, but selling a service rather than
manufacturing an object. I still fail to see how the table is more
wealth than the service.
> From an economist point of view, manufacturing increases wealth,
> service doesn't.
>
Er, not. My best friend's father when I was a kid was an economics
professor at SMU and later at U Wash. I studied the first year economics
text he wrote (The Economic Way of Thinking, in case anyone's
interested). He would not have agreed with you. Anything which can be
paid for can increase wealth.
> Which is not to say that you can't sell services to China, for
> example, but it's just not a significant element. You would have to
> sell over 1 BILLION dollars a day of programming to the Chinese,
> repeat, PER DAY, to bring the books into balance. I don't think
> that's going to happen, do you?
>
Again, I haven't figures on goods versus services in international
trade.
> >As for trade deficit, I confess it's always been a mystery to me why
> >this is important. I don't see why it's important to keep this in
> >balance, in the broad scheme of things. I would imagine, for example,
> >that Japan has a huge trade surplus-- that is, they import much less
> >(value) than they export. And yet, until recently, they had one of the
> >most tremendous economies in the world. And I kinda doubt that the fall
> >of their economy is caused directly by their trade deficits.
>
> Actually, Japan is a GREAT example. We are following in their
> footsteps exactly. They USED to be great manufacturers and exporters.
> Then they decided that they would tranfer their manufacturing to the
> other Asian tigers (as their standard of living increased, the other
> countries offered cheaper labor). Next, when their economy started
> going down the toilet, they embarked on the path of printing money,
> and offering lower and lower interest rates in order to "grease the
> wheels" of their faltering economy. Eventually they were giving away
> money practically interest-free. Sound familiar?
>
Can't comment. I don't know why Japan's economy has faltered. But per
your example, it's not at all clear that their trade deficit killed
them.
> When you were young, the USA was the worlds greatest creditor nation.
> As recently as the 1980s we were still in the black. Now, we are
> the world's largest debtor nation, by miles!
>
> I believe the amount now owed to foreigners is something like 3 or 4
> TRILLION dollars. It's increasing at over a BILLION dollars a day.
> (There's that trade deficit you were asking about).
>
> If you really don't think this is a problem, then why don't we ALL sit
> down and watch tv all day, and drink beer and watch our big-screen
> tvs. We can just print up more money, as required, and buy whatever
> we need. I'm serious--if piling up a deficit isn't a problem, then
> we're nuts to knock ourselves out at jobs.
>
> Here's the problem: If I go to my neighbor and buy his lawnmower, and
> say, "Mike, I'll give you an IOU for $100, ok?", he might well go
> along. He might even trade my IOU to his brother, to buy his old 486
> computer for a firewall. The next day I go to my neighbor again, and
> buy something else, for an IOU. Etc, etc....
>
> Depending on how much my neighbor likes me, sooner or later, there
> WILL come a time when he starts having doubts about these IOUs. It
> turns out that I won't redeem the IOUs, because I have nothing of
> value. The only thing that Mike can do with my IOUs is trade them to
> others. And his brother, and others, won't take them at face value
> any more either!
>
> At some point, your currency starts to plummet. In the history of
> man, no country has had a fiat currency (ie, not backed by anything)
> that did not eventually self-destruct. (and reach a value of zero)
>
You would be correct if that were the case. If the mint printed money
willy nilly, eventually the money would become worthless. I'm inclined
to think that the figures on money supply don't support this, though.
You're suggesting mercantilism as the answer to our economic woes? All
that does is limit the supply of money. You could pass a law to limit
the money supply, which would do the same thing. Tying the currency
supply to the gold supply (or other objects), given a relatively fixed
supply of gold and an ever-more-productive economy would simply create
deflation on a scale never imagined.
> So, I would suggest to you that one reason to worry about a printing
> press, consumer-driven economy is because of the "reckoning" that WILL
> come some day. I imagine it will be so painful that the 1929+
> depression will look like a picnic.
>
> But perhaps an even more compelling reason is the immorality (there's
> that word again;-), of piling up all this debt which will be paid (in
> one way or another) by children who had no responsibity for it.
>
What debt? If you're talking about trade deficit, I don't see the
reasoning. Assume for a moment that the US has a trade deficit, and that
a trade deficit is really a way of saying, "We consume more than we
produce." How could that be? Unless we had accumulated enough unspent
wealth to afford to buy all these products. Then the wealth was finally
spent. That would indicate that some of the wealth formerly housed in
this country was going elsewhere. At some point, it would equalize.
You mentioned that we used to be the world's biggest creditor, and now
we're the world's biggest debtor. Should we have remained the world's
biggest creditor forever, or should the debt equalize at some point?
This reminds me of a principle of physics called entropy. A pendulum
swing in which there is ebb and flow until there is finally equilibrium.
Paul
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