Market-Based Management®

Conceiving Wealth—Past and Present

A common charge leveled at the modern economy is that “we don’t make anything anymore.” True, while services have accounted for a greater share of GDP since around 1911, our natural inclination is to think of wealth as the creation of goods, rather than the provision of services, trade, banking, or other financial services. Of course, wealth really has not so much to do with what is produced (good, service, or the completely intangible), but is more or less a reflection of the values people place on these whats. All that being said, we often have difficulty identifying new forms of wealth as being valuable. Consider this quotation from the great 18th century economist Francois Quesnay regarding the creation of wealth or value in what was then an economy slowly shifting from agriculture to manufacturing and commerce.

“Those who make manufactured commodities do not produce wealth, because their labour increases the value of commodities only by an amount equal to the wages which are paid to them and which are drawn from the product of landed property. The manufacturer who makes cloth, the tailor who makes clothes, the cobbler who makes shoes do not produce any more wealth than do the cook who makes his master’s dinner, the worker who saws wood, or the musicians who give a concert. They are all paid out of one and the same fund, in proportion to the rate of reward fixed for their work, and they spend their receipts in order to obtain their subsistence. Thus they consume as much as they produce; the product of their labour is equal to the cost of their labour, and no surplus wealth results from it. Thus it is only those who cause to be generated from landed property products whose value exceeds their costs who produce wealth or annual revenue.”

It would appear that before complaining that “we don’t make anything anymore” people floated concerns about workers not growing things anymore. One can only imagine what we will hear form the pundits of the future, “we just don’t consult anymore?”

P.S. I have not drawn this quote in order to bash Quesnay. He was one of the finest economists of his time and exerted incredible influence on Adam Smith. However, the quote both illustrates the fallacy that only tangible things have value, and testifies that great thinkers past and present still don’t quite get everything right.

The Grumbling Hive Revisited: Did Modern Economics begin with a poem?

I recently came across "The Grumbling Hive," a poem written by Bernard Mandeville in 1705. Although long and difficult to read, this remarkable poem explores how the market process channels human vices toward productive ends (people can only get what they want by providing for others). Although "The Grumbling Hive" is tame by today’s standards, it created a firestorm upon publication, and was widely denounced for supposedly thumbing its nose at morality (the 1723 edition would earn Mandeville an indictment for nuisance). I’ll let the poem speak for itself.

While Adam Smith made the same point (albeit much more tactfully) seventy-one years later, "The Grumbling Hive" is a bit of a “lost” work in the history of economics and certainly deserves more attention.

Is There a Case for NOT Teaching Our Children Economics?

I’ll preface this post with a caveat: I believe that for the most part that there is not a lot of formal economic education in the United States, and one can often only find it in the higher levels of education. That being said, I do believe that Americans get a hearty education in economics throughout their lives—mainly through their own interaction with the world’s largest and mostly free-market economy. Most Americans may not read Smith, Von Mises, Hayek, Freidman, ect., but their day to day learning allows them to “get” economics anyway. I would argue that most Americans realize that if they produce things that others value, then they will be rewarded, and that those who succeed at this should be allowed to keep most of the value they create and entrusted with more economic resources. Furthermore, Americans tend to get irked when folks steal from one another (illegally and legally), and nothing upsets them more than hearing of someone who has lost their home to the unscrupulous misuse of eminent domain or otherwise failed to earn their windfalls without hard work and/or risk. Thus, I believe that Americans grow up and prosper with a hearty—and largely self constructed—respect for property rights, the profit motive, risk, incentives, and the rule of law.

Despite my own hearty respect for this culture economic self-teaching, I have always been a big fan of teaching economics to middle and high school students—7th grade seems a good place to start. However, comments on this article on the “economics education” received in some countries have been floating around the economics blogosphere, and I am starting to think that perhaps it might be better to forego any attempts at economic education and just maintain the current system of letting folks learn it in the marketplace. The reason being, that while some countries do provide economic education for their youngins, what passes for “economics” is not just wrong but rather disturbing.

P.S. The link from the Economist's article does (at present) not link to the full article in Foreign Affairs, but should hopefully soon be restored.