Err, No

If we go by the Adam Smith definition of wealth creation, as the combination of materials, labour, land, and technology in such a way as to capture a profit (excess above the cost of production),

That isn\’t, I think, quite the "Adam Smith" definition of wealth creation.

Firstly, he would use "land labour and capital" as the description of what must be combined. Secondly, he didn\’t equate wealth creation and profit in quite that manner. Certainly, making a profit by such a combination makes wealth for the person who receives the profits. But that isn\’t, really, at the heart of what Smith thought wealth creation was all about.

Rather, it\’s the division of labour, the specialisation that such division allows and the trade of the subsequent higher production is what creates "wealth".

Entrepreneurs, capitalists, struggling to make a profit, these might, perhaps, be thought of as the proximate cause of wealth creation in the Smithian universe, but the ultimate cause is the division of labour, specialisation and subsequent trade that such facilitate.

This different emphasis does make a difference though: it\’s possible to imagine an economy where wealth is indeed increasing and yet no profits are being made…..

 

 

6 comments on “Err, No

  1. God that’s depressing – especially the idiots happily telling themselves that the public sector cannot be wealth creating. I spend a lot of time looking at left wing blogs and worrying about the quantity of moronism on display – perhaps i need to spend more time on blogs like Iain Dales to rebalance by perceptions of the distribution of moronism.

    Wealth (of the material sort) measures households’ ability to consume goods and services. You cannot consume what is not produced. Wealth is therefore created by investments in physical and human capital, and by technology in the broadest sense (i.e. including institutions, social norms, etc.). Anybody who contributes to this production function, so to speak, is helping create wealth. This includes entrepreneurs, financiers, teachers, and bureaucrats. The government provides all manner of inputs to the production process, especially the all important technology bit, and there is a long list of reasons why a central state may be a better provider of certain inputs, and some of these inputs may even by complements to private sector inputs and thus very important.

  2. Wealth is production, in that a wealth creator takes something of low value and increases its value to some other individual. In a money economy, price can be a useful indicator of value, although price only has meaning at the instant of exchange.

    As such, Jacqui Smith as a teacher in the public sector was not creating wealth, as her service was not purchased and thus had no value; we can be sure of this because, guaranteed, if any of the poor mites who had to be confronted with her pallid cleavage had had to pay for it, they wouldn’t have been there.

    If a person takes a piece of wood and fashions it into a chair, and some other person purchases the chair for a greater price than was paid for the wood, wealth has been created (all wealth suffers entropy though; the chair will gradually lose its value, and thus a society’s wealth creation is the increase in aggregate value due to new production, minus the loss of aggregate value due to chairs being thrown away).

    It is possible for a public sector worker to create wealth- a nationalised coal miner or steel worker, for instance. In general, though, they will create less wealth than they would have done in the private sector (not necessarily true of the NCB, funnily enough, which by the end was quite efficient). This is only the case when they are doing a job which would be freely purchased in the marketplace anyway.

  3. IanB

    “Wealth is production, in that a wealth creator takes something of low value and increases its value to some other individual.”

    Not quite. Production is part, a key part, but only a part. The other part, which Tim is banging on about is the trade bit. I don’t have to do anything at all to the stuff I have. All it needs is for someone to have a more productive/useful application for it than I do. I can leave the stuff completely untouched – I don’t have to do anything to it at all, but at the end of the trade we have both benefitted – we are both richer.

    Land for example. Not much of that being produced.

  4. Guys, come on! You need to ditch the barter economy thinking, because whole lot of “wealth creation” had to do with getting beyond barter (the invention of money, contracts etc.).

    You cannot use “what would the private sector pay for it” as your measure of whether the public sector is creating wealth, because the whole point of having something produced in the public sector is that there’s something about the good/service that means the private sector (market) wouldn’t cope with it (price it) properly (econ 101 public goods and so forth).

    Think about the implications of taking “somebody paying more than it cost to make” as your measure of wealth creation. If wealth creation is in the gap between price and cost, does a larger gap mean more wealth creation? Wealth for who? The producer or consumer? Even thinking about just producers, if you get £10 from selling the chair you made, how wealthy are you? That depends on the productivity of the rest of the economy – what can you buy for £10? The best way to think of wealth creation is anything that increases the productivity of the economy.

  5. luis,

    “The best way to think of wealth creation is anything that increases the productivity of the economy.”

    Ummm, isn’t that exactly what I said?
    “All it needs is for someone to have a more productive/useful application for it than I do. “

  6. Cleanthes,

    fair enough. I’d read you to mean that all Ian needed to add to his story of direct value-add in goods production was trade – my point was teachers, bureaucrats, judges etc. are also all (potentially) wealth creators.

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