Michael Battalio


Friday, September 19, 2014

Discussions on Wealth (part 2): Chapter 2

This discussion on wealth is an offshoot of Serious Conversations parts 53 and 54. We are considering the book The Origin of Wealth by Eric D. Beinhocker. (I do not profit from clicks). (Ed.: we will be taking the general format of outlining the major points of the chapter and then discussing what we believe to be important or intriguing points.)

Chapter 2 summarizes the history of today's standard economic theory, which, according to the author, has become overly academic and relies on models and assumptions that don't accurately reflect the real world. DoW part 3 will begin a discussion on Chapter 2.

- Modern economic concepts were originally thought up by moral philosophers like Adam Smith in order to understand how wealth was created and distributed.
    - Wealth is created by people adding labor to raw materials.  The key to increasing the amount of wealth is to increase the productivity of the laborer   The division of labor allows for specialization and thereby increases productivity.  Specialization necessitates trade, which means there must be an exchange rate for measuring the relative values of different goods.
    - The most just way to allocate resources is to allow free trade and competitive markets (the invisible hand).  The system naturally distributes itself in the most just way and comes to an equilibrium, which is the best overall state for society.  The concept of equilibrium is central to traditional economic theory.
    - The law of supply and demand says that a laborer will only put work and raw materials into producing something until the rewards no longer justify that work and raw material.  On the demand side, a consumer will derive a lot of value out of a small amount of a product, but eventually one more of the same product will no longer have enough value to be worth the cost of purchasing it.
    - Individual economic choices are calculated by the individual to maximize utility. Furthermore, society should be organized to maximize the collective utility. People are rational in economic choices, logical, and consistent.
- Eventually all these conceptual ideas were put into a mathematical framework, with a lot of assumptions thrown in to make the math doable.  The mathematical notions were borrowed from physics and rely heavily on constrained optimization.  Equilibrium was very important in the mathematical theory.
- The original theory didn't account for growth, change, and innovation.  Newer theories use the idea of dynamic equilibrium or balanced growth.  There is disagreement over whether the growth is endogenous or exogenous to the system.
 
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