Another "simple" economics question

[sammysusar]

Each yr new technology allows us to be a certain percent more efficient. So in general we can produce more products with the same amount of work. this is economic growth

[vulturesrow]

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If there is a market for it, than it is some people's self interest to buy these 200$ underwear.

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Assuming people are perfectly rational consumers, yes.

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Define perfectly rational.

[SheetWise]

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I am not trying to evade anything. Services are valued in the same way as manufactured goods. In fact, the line between the two is basically an arbitrary one when it comes to most products. I obviously cannot "give you a value of services" any more than I can give you a value of goods. The market ends up deciding for each individual good or service, then the guys in the government statistics bureau estimate the total.

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They are not valued in the same way. In an affluent society, good chefs demand premium rent. If I pay someone $100 above the $5 cost of my food simply to prepare it for me -- is that economic growth? I say yes, even though nothing that has any lasting value was added to the economy. The fact that I value my attorney at $500 an hour, and choose him over a $100 alternative, is economic growth. Money voluntarily changing hands is economic growth.

[sam h]

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Money voluntarily changing hands is economic growth.

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No, that is just passing money around. Otherwise we would all be a lot richer!

I think you are hung up on this services thing, and partly for good reason. Many services are indeed some of the most valuable "products" (or components of products) in the world. That is one reason why advanced economies are largely service-driven at this point.

Services are indeed valued in the same way as manufactures, in the sense that the market determines their value. There is a market for fine dining that determines how much people will pay for a meal and a labor market segment for good chefs that determines how much they make. The same goes for lawyers.

The key thing that you are missing is that the transactions themselves do not add to growth, whether it is a transaction over a service rendered or a manufacture purchased. We could pass the same money back and forth until the cows came home and it wouldn't matter if the products stayed the same. Similarly, firms could engage in monopoly to raise prices on all sorts of items and it wouldn't contribute to growth. It's not about the money.

Rather, its about creating value by finding new and innovative ways to combine the things we have (basically labor and capital) to make more valuable products (meaning both manufactures and services). Transactions are of course necessary. Otherwise you would just create more things and they wouldn't be put to use, and also there wouldn't be much incentive to create new and better things.

Here is a good link
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So the question then becomes: Where does innovation in creating new and better things come from?

[vulturesrow]

Im sort of surprised this question has generated much discussion. I dont think this is something that many economists disagree on these days...

BOMBS! LOTS OF [censored] BOMBS!!!

[2+2 wannabe]

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What causes economic growth (in the long-term)?

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I believe it's increasing per capita production.

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the Solow model is old-school theory

[Il_Mostro]

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So the question then becomes: Where does innovation in creating new and better things come from?

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Necessity is the mother of all invention.
And for the last 100 years, cheap oil has been the father.

[SheetWise]

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BOMBS! LOTS OF [censored] BOMBS!!!

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Your post just made me aware of the bodog.com ads. They are bypassing the profanity filter!

[mosta]

there are two kinds of growth, extensive (new people, new land,
expansion), and intensive (increased productivity--getting
more out of what you started with than last time). extensive
production tends to run into limits. acient and pre-modern
economic systems were extensive. eg, slavery. in slavery it
is difficult to improve productivity because complex
cooperation is next to impossible because the cost of
monitoring and motivating labor dominates any other elements
of production. a slave system can only grow by getting more
slaves and more land (note: slave production on a large
scale tends to exhaust the land because it's too primitive).
when a slave system can no longer keep expanding, it stagnates
and collapses.

intensive production generally requires the subsumption of
labor to capital, which has two aspects. 1. formal subsumption--
separating labor from their own means of subsistence. peasants
are self-sufficient. if the feudal lord were to "fire" a
peasant", the peasant jumps for joy, goes home, and
works on their own plot for themselves. take away
that access to a means of subsistence and instead of a
peasant you have a worker, who if fired stands to starve.
this arrangement goes a long way to solve the problem of
motivating labor.

2. real subsumption of labor to capital. if you separate
workers from their own means of subsistence, you have
capitalism formally. eg, the putting-out system. workers
come by your house and pick up raw materials. later they
come back with finished product. the capitalist typically
pays by amount produced. they don't pay by the hour, because
they don't know or care how many hours it takes.

this system still doesn't work very well, because the
workers will find that it's more rewarding to produce
shoddy substandard product and misrepresent its quality
and quantity. quality control becomes a dominating
problem. furthermore, complex cooperation (division of
labor) is still mostly unfeasible, because it's too
expensive with production dispersed, and because it generally
relies on quality control too.

the real subsumption is for capital to also control the
labor process, by taking direct supervision of the labor
process, bringing it in--ie, the factory system. this is
machine capitalism. workers are well motivated, controlled,
supervised, and the production process is organized and
developed.

machine capitalism is able to develop primarily through
intensive growth. that is the first, background, answer
to how it's possible. it is straight Marx, but note that
none of it depends on or implies anything anti-capitalist,
pro-communist, pro-authoritarian. read the previous
sentence 10 times slowly if the word "Marx" makes you
start panting and snarling. (note: an argument or analysis
can be separated from the personal views and other arguments
of the author.)

note there is a third, pathological sense to "growth": I can
grow my resources by taking from you and making you worse
off.

I think it is fairly well established macro economically
(I kept only taking micro...) that there is real measurable
intensive growth. ie, measurable growth that does not
depend on increasing the scale of the economy (even though
that may happen at the same time), and growth wherein every
one is made better off (ie, not some becoming richer by
making others poorer)--see, I can be a Marx scholar without
being anti-capitalist!

how this happens? labor theory of value. (also Marx. also not
anti-capitalist.) I won't prolong this essay. but suffice
it to say that utilitarian economics is completely unable
to cognize the comparative economics I did above, and unable
to account for intensive economic growth. I'll just try to
put the labor theory very simply and succinctly: look at
an economic system over time, at two points successive
points. you have an array of goods and services at t1 and
another one at t2. some of the goods and services at t1 ("capital")
are consumed as means of production for goods and services
at t2. you might think that as a limit the the goods and
services that come out of those at t1 could never
be greater than what there was at t1. there is a way around
that limit. labor. workers are part of the economy at
t1 and at t2. they have to be "reproduced" or sustained or
maintained, just like the rest of the factory from t1 to
t2 (fed, housed, entertained, etc). the neat thing about
workers is that they can produce more work than is consumed
in their own maintenance. and that differential can be increased.
QED. intensive growth.