More economic silliness

Another email from a protectionist containing this gem of a line:

Service industries do not produce wealth.

No, seriously, they do believe this. They go on:

There are a limited number of ways a society can become wealthy.
1. Hunting
2. Gathering
3. Fishing
4. Farming
5. Manufacturing (along with that go the exploitation of natural resources: mining, oil production and timber)
In the context of the US they are therefore saying that agriculture (8% or so of GDP) and manufacturing (12%) are the only things that produce wealth. All of everything else, 80% of US GDP, isn\’t in fact wealth at all.
In fact, they\’re stating that all the lawyering, medical care, insurance, banking, restaurants, hotels, supermarkets, well, just about everything in fact, do not add to the wealth of those who consume their products.
Which is sufficiently weird as a belief to explain their similarly odd ideas about trade really.

29 comments on “More economic silliness

  1. Presumably it’s the simplistic idea that all wealth comes out of the ground. The idea that our standard of living has been raised and maintained far more by human ingenuity than by raw materials is a bit harder to grasp, so most people don’t seem to bother.

  2. Wealth comes from efficiency.

    Supermarkets, banks, hotels, restaurants etc etc all make life faster, simpler, less risky and of course more efficient. Therefore the farmer need not stop farming to spend time tramping the villages searching for someone to lend him money or that he has to grow all his food, I mean ALL of it.

    Some people will not be happy until we are all scratching a living as subsistance farmers. Well, when I say “all” of course that does not include

    a) those types pushing this lifestyle, as they will be the new elites and high priests.
    b) 9/10ths of the current population that are now in the ground fertilising the food we are trying to grow.

  3. A goodly proportion of your readers believe that the government cannot create wealth.

  4. “A goodly proportion of your readers believe that the government cannot create wealth.”

    No, just very little. Unless you count a colourful brochure on diversity in the workplace as “wealth”, in which case we’re all amazingly rich.

  5. “A goodly proportion of your readers believe that the government cannot create wealth.”
    They can- but have little incentive to so usually don’t. When they try they are usually inefficient- and so do not create as much as a private equivalent.
    Sadly there is not always a private equivalent- so we are stuck with a certain amount of government (Law and War come to mind- the former a more important service industry than banking, and a necessary monopoly, the latter safest as a monoply)

  6. So we can all become wealthy by taking in each others washing then? Or does someone somewhere have to create something from nothing (dig an ore out of the ground, grow a plant, raise an animal, make something from raw materials) in order to create some wealth to be able to pay someone to take in their washing?

    Whether or not a service creates wealth depends on whether or not it results in increased production of a product somewhere down the line. A network of hotels that is used by travelling salesmen to increase the sales (and therefore production) of their products adds value. A seaside B&B that is used by holidaymakers merely consumes wealth that must be created elsewhere.

  7. That is a problem with the GDP measure, but the alternative is to include estimates of the shadow economy, but it is obviously very difficult (and time-consuming).

    Although, if you do include the shadow economy estimates (even though the papers don’t often agree on precise figures), GDP per capita of the European economies like France and Germany goes up relative to the UK and America.

  8. A goodly proportion of your readers believe that the government cannot create wealth.

    Please enlighten us us on the top 3 instances of government created wealth that can’t be created more efficiently in the private sector.

  9. Please enlighten us us on the top 3 instances of government created wealth that can’t be created more efficiently in the private sector.

    Samsung, Nokia, Toyata?

  10. It is very strange to me to read so many non-socialist commenters who so seriously misunderstand the ideas of ‘wealth’ and ‘value’.

    Both are things, whether goods or services, sometimes at hugely esoteric levels of abstraction, that individuals want enough to trade for, usually using money.

    Does an Islamic terrorist care for his ‘standard of living’, or does he want explosives? Like it or not the explosive is ‘value’ to him. He’ll work many hours to get money to buy them when he will not do the same for consumer goods, which he often regards with contempt.

    Also, governments do create some wealth. They do produce some classically defined goods and services, but also, and mostly, produce the orgiastic sense of order and control that socialists crave.

    Get used to it – the socialists, which includes you lads and lassies, every time you support yet another government initiative, get wealth from government.

    As for the idea that services do not create ‘wealth’, nonsense, when babycakes the hooker gives me a blow job for 50 bucks, I am truly wealthy.

  11. Sobers

    …..A seaside B&B that is used by holidaymakers merely consumes wealth that must be created elsewhere……

    A brilliant misunderstanding of value creation.

    The cost of providing the service is less than the price that B&B guest are willing to pay. Therefore it has created value.

    In fact, I will stick my neck out and make an extravagant claim that I have no data to back up. Services are better at creating value than manufacturing, because they need far less in terms of expensive material inputs.

  12. Restaurants are presumably a service industry only insofar as someone brings the food to you and it’s then cleared away. A chef seems more like a highly-skilled manufacturing worker, creating value by assembling raw materials?

  13. Luis, an understandable mistake, but what you see are people who instead believe that governments DON’T create wealth. Not can’t, but don’t, looks like an easy confusion, but really quite significant.

    In fact perhaps governments more often destroy wealth as create it, but it isn’t that they can’t but that they’re typically very inefficient at doing so.

  14. see Tim? in their own way, your commentariat are as embarrassing as the nutbags that haunt, say, LC.

    some quick points (but really I’m going to cite Bob Solow on my reasons not to engage here)

    1. not creating wealth “as efficiently” as the private sector != not creating wealth.
    2. explain the curious absence of wealthy countries without large governments (try reading things like this (skip the maths, look at discussion and data))

  15. the simplest example I use on “pro-manufacturing” types is the MP3 vs the CD. Both deliver roughly the same thing, but one is considered as manufactured, the other isn’t.

  16. I’m normally considered a ‘pro-manufacturing’ type, and for reasons unknown I wish to state my position here.
    I do not wish for protectionism, or for ‘manufacturing’ (however defined) to be promoted above all else.
    What I desire is for manufacturing to not be unneccesarily hindered, as I believe it has been in the UK for some years by a lack of investment in infrastructure (roads etc) and excessive regulation.
    I fully agree with Tim’s point that ‘manufacturing’ should not be put on some sort of pedestal above all else; but I believe it’s equally foolish to do the same for ‘services’, as I believe has been done.
    Given the right environment, all parts of the economy can add value and generate wealth. We shouldn’t artificially encourage or discourage any sector.

  17. Luis

    1. I think you are being very generous. That is like my saying I cannot run the 100m as fast as Usain Bolt!
    2. That is so disingenuous, as the State sees the fat country and begins its feast by stealth, i.e. Fabianism.

    BTW the biggest key to wealth is Rule of Law, not low taxes, but then when you have a Big State, Rule of Law eventually gets poleaxed due to the demands, as we see now, for scapegoats, more sequestration, fines, regulations (with fees, natch), intrusive taxes…

  18. Fred Z has it exactly right. The case of the seaside hotel is a case of where a business providing accomodation provides something of value for which the person is prepared to exchange something, ie, money. All wealth comes down to people exchanging something they value less for something they value a bit more.

    The idea that wealth must involve creating a thing, is linked to the labour theory of value that underpins the whole, decrepit system of Marxianism.

    Vimothy is right that the rule of law is a key to wealth, although a society with other than low taxes tends not to be very good at wealth creation, or much else.

  19. explain the curious absence of wealthy countries without large governments (try reading things like this (skip the maths, look at discussion and data))

    What? There are wealthy countries with big governments, but those big governments tend to arise after the wealth is created, and start to eventually erode the wealth creation process. Sooner or later, if the wealth creation process is to continue, government has to be cut back.

  20. Ah I see. So we observe a correlation between wealth and capitalism, and conclude capitalism is good for your wealth, but we observe a correlation between wealth and large governments and conclude that governments are bad for your wealth.

    How does saying we’d be even better off with smaller governments differ from saying we’d be even better off without capitalism? Does the absence of countries that have meaningfully shrunk their governments subsequently gotten richer in now way dent your conviction it would do so? I’d have thought the absence of countries that have abandoned capitalism and subsequently gotten richer ought to worry socialists.

    I’m sure that governments do lots of things we’d be better off if they didn’t, and governments certainly can get too big. But saying they should be 38% of GDP rather than 42%, or whatever, is a long long way from saying that 38% is holding us back. Equally there may be things they don’t do we’d be better off if they did.

    There are left wing idiots who regard anything to do with profits and markets and evil, and who fill their heads stories of markets going bad, and there are right wing idiots who regard anything to do with governments as detrimental, and who fill their heads stories of governments being useless. In both cases they ignore the main EMPIRICAL story, that markets plus governments equals human betterment.

    JP it’s not so much that the way you interpret the data is wrong, it’s that you haven’t even got any data. Show me big governments arising after wealth is created and eroding growth.

    Of course I’m not suggesting anything as daft as increasing government causes increased growth, merely that the converse is just as daft and that all the evidence points to successful countries also having large governments.

    try this:
    http://www1.worldbank.org/publicsector/pe/pfma07/CJE.pdf

    [Governments attempting to plan the economy and run industries, yes do damage, actually existing North American and OECD governments, not so much. But doing some damage here and there != doing damage on net].

  21. I’m just a simple farmer but as far as I’m concerned wealth is stuff. If I spend my money on a new tractor I have less cash, but still have a tractor. Which has value (not necesarily what I paid for it, but value nonetheless). It can create me an income by doing work. If I use it to plough the fields, and plant crops, I create wealth.

    Whereas if I spend my cash on a holiday, while I may have a very nice time, and on a personal level think the £X I spent was worth it, at the end of the day my cash is gone and nothing tangible has been created. Just a few memories and experiences floating round my brain.

    I repeat my question, which so far no-one has answered, if manufacturing and primary industries are irrelevant to wealth creation, can we all get wealthier and wealthier by taking in each others washing? Why throughout history have primary and manufacturing industries been the wealth creators? Which wealthy society has grown up from services first, bypassing making and mining stuff?

  22. I repeat my question, which so far no-one has answered, if manufacturing and primary industries are irrelevant to wealth creation, can we all get wealthier and wealthier by taking in each others washing?

    Primary industries are not irrelevant.

    Technically we can, but not by much. A ‘true’ GDP measure (different from the one we have) will include a person’s domestic economy, because labour is expended to wash clothes, cook food ect. The problem is that estimates are very imprecise, and so cannot make up a part of national accounts. And anyways, GDP is not the be and all and end all.

    If everybody takes in each other’s washing, it means that they probably work a tiny bit more (or consume less other stuff) so that they can pay for the washing service.

    It only makes sense to do this if they prefer the other person doing their washing (and paying money) than using their own labour to do it. So yes, value is added.

  23. There’s a fair point here, and indeed Tim has often made the point – a lot of the increase in GDP really reflects the replacement of non-market services, such as cooking and cleaning and mending clothes etc with market-based services. This tends to increase GDP (otherwise why do it?) but obviously by much less than the amount recorded.

    Tim adds: I also go a little further. Since market labour includes the possibility of division of labour and specialisation in a way that household labour generally doesn’t we would expect market labour to be more productive. Thus this move to maket based rather than household based does make people richer….but not by quite as much as the rise in GDP would lead us to believe.

  24. Perhaps better to call it ‘value’ rather than ‘wealth’, which is a word with too many connotations.

    Sobers, if you didn’t think the holiday made you better off, why did you spend money on it? Why not buy another tractor? Masochism? A desire to make yourself more poor? Or perhaps another tractor was worth less to you than both the holiday and continuing to hold your money? In fact, by definition, that is the answer.

    To determine value, we must watch what people actually do, not what they say they want to do. You, no doubt with great puzzlement as to why you were ‘pissing the money away’ actually took a vacation, even though at some level you also wanted more equipment, just not enough to act on that want.

    Also, value varies with the individual involved and time. The time variation can be quite fast and quite large. I too find vacations nearly worthless after they are done. My father in law, a farmer, never saw a tool or piece of equipment without purchasing it if he had any money, and only took a vacation when his wife grew vicious about it. So sometimes valuation is done group-wise.

  25. “I’m just a simple farmer but as far as I’m concerned wealth is stuff. If I spend my money on a new tractor I have less cash, but still have a tractor. Which has value (not necesarily what I paid for it, but value nonetheless). It can create me an income by doing work. If I use it to plough the fields, and plant crops, I create wealth.

    Whereas if I spend my cash on a holiday, while I may have a very nice time, and on a personal level think the £X I spent was worth it, at the end of the day my cash is gone and nothing tangible has been created. Just a few memories and experiences floating round my brain.”

    If you didn’t want to go on holiday, or spend money on any service, you may feel inclined to work less as you need less money and so produce less of whatever you farm which I might want to buy. But because you value the holiday, and for all I know cinema, theatre, music, books etc, things you need money for, you are motivated to farm more to earn more to pay for all the services that you do in fact value. Because of the holiday, you have had something you value, the holiday, and your customers have had something they value, your produce.

    Of course if you were taken ill on holiday, a medic may heal you allowing you to carry on farming on your return again adding to what you call primary industry.

    I don’t really buy the concept of “primary producers”, but if you do, and however you define it, those producers, are only motivated to produce as much surplus as they do in order to consume non primary services that they value.

  26. Luis writes:

    “JP it’s not so much that the way you interpret the data is wrong, it’s that you haven’t even got any data. Show me big governments arising after wealth is created and eroding growth.”

    How about Argentina under Peron, for instance? The man took what was the potential Australia or Canada of its time and, after spending money, nationalising industries and the rest, drove the economy into the ground.

    Then there is the Heritage/Wall Street Journal index of economic freedom which shows a pretty good correlation between countries where governments take a relatively small share of GDP, and economic welfare generally. Etc.

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