Monday, July 30, 2012

Intellectuals and Society: Poverty And Wealth

Intellectuals have a great tendency to see poverty as a great moral problem to which they have the solution. The human race began in poverty, so there's no mysterious explanation as to why some people are poor. The question is why have some people gotten prosperous, and in particular why some have gotten prosperous to a greater degree than others. But everybody started poor, so poverty is not a mystery to be solved by intellectuals. More than that, intellectuals have no interest in what creates wealth, and what inhibits the creation of wealth. They are very concerned about the distribution of it, but they act as if wealth just exists - somehow. It's like manna from heaven, it's only a question of how we split it up.

[...] Most intellectuals in most countries around the world see the issue as how those who are more prosperous should be brought down, and moreover that the people who are lagging should cling to their culture. I don’t know how you're going to keep on doing what you've always done and get results that are different from what you’ve always gotten.

Thomas Sowell

What is wealth?! This is a basic question one might ask. Paper money is not wealth! Wealth are the actual goods and services that a person has access to. Wealth are the goods and services which can be used to satisfy our human desires and needs.

A fish swimming in the ocean is not wealth. A fish caught in the net of a fisherman is wealth. The difference is that the fish in the ocean is not accessible to anyone, it cannot satisfy hunger by the virtue of existing. However, once that fish is caught, it becomes accessible and can satisfy hunger. Then, and only then, that fish is considered wealth.

Rocks found in nature are not wealth. A house that is built with those rocks is wealth, because houses can be used to satisfy the need for shelter.

In other words, our wealth depends on our capacity to transform raw materials found in nature into useful products that we can use in our everyday life. This process requires deliberate actions made by individuals.

A caveman no matter how much wealthier he is compared to his fellow cavemen is much less wealthier than most of the people we consider as poor in our day and age. There are two fundamentally different ways to measure poverty and wealth. The first is absolute measurement; Such measurement would lead us to see how the poor individuals of today are indeed much wealthier than their predecessors. The second way is comparative; That is comparing the wealth of one person to another. However, the second way can lead to disasters in terms of human progress. Most intellectuals on the left-wing of politics focus on the question of wealth in the comparative sense, but without the faintest understanding of how their type of analysis affects wealth in the absolute sense.

Having millions of dollars means nothing if there were no fish to eat, no houses to live in, no cars to drive, or no mobiles to use. In a world without goods and services, it does not make a difference if you have a million dollars or no money at all, because there is nothing to buy in the first place. Money derives its value from the goods and services you can buy, not from any intrinsic value that money has.

Without Microsoft Inc. there would be no MS Windows to buy; Without Apple Inc. there would be no iPads to buy; Without GM Ford Inc. there would be no cars to buy; And without IBM Inc. there would be no computers. Without the effort the individuals behind those companies invested, the products which we take for granted would not have existed. So, is it reasonable to claim that it is unfair that Bill Gates owns more money than other people, when the reason he became rich is that individuals found the products and services his company provided beneficial to billions of people around the globe?! Every single individual who bought MS Windows has participated in creating Bill Gate's wealth: His wealth is proportional to the amount of service he provided to individual people.

There is general fallacy that people generally commit when thinking that paper money is a measure of wealth. For example, let's say a person bought a car for 4000$; Did that person lose wealth or gain wealth?! Most people would say that this person lost wealth because he now has 4000$ less. This is the fallacy of thinking that money is a measure of wealth. 4000$ sitting in a bank account is worthless if you do not benefit from it. So, the person who bought the car has converted "virtual" wealth in the form of paper money into real wealth which is the car. The car itself is the real wealth, not the paper money.

Real wealth is a function of technology (also called "capital"). Real wealth depends on our ability to convert raw materials found in nature into useful products that we can use in our real life. A fishing net is technology: It enables fishermen to extract fish found in the ocean into fish that we can consume. Before the invention of fishing nets, people had to catch fish by their bare hands. Such a method might require numerous hours to get 4 or 5 fishes to eat. Using fishing nets we can now get hundreds of fish to eat in a small amount of time. The fishing net is thus called capital.

It can be easily seen that in a primitive society that has not invented fishing nets would be much poorer (even if the fish were evenly distributed among members of that society) than one where fishing nets have been invented (even if the fish is not evenly distributed) because the second society has higher yield of fish. Yield is the amount of resources required to obtain certain goods; Time is one of the resources that is required obtain goods; So, the higher yield in the second society is because they were able to produce more fish in a given amount of time. This increased efficiency would improve the wealth of society as a whole and the individuals within that society.

In a primitive society, if an oil field exploded in your farm, this would be a disaster, because the crude oil would destroy your crops. In that case, oil is not wealth because the technology that makes use of oil has not been discovered yet. On the other hand, in today's world this would be great fortune, because that oil can be used to run cars or be used in industry; Oil is now a commodity that serves our human needs. In other words, a primitive society cannot convert the natural resource of oil into a valuable commodity, but an industrial society does.

In short, wealth is a function of technology. The discoveries that improve our use of scarce raw materials that are found in nature. Whether it is a fish that you don't have the tools to hunt, or the oil that you cannot put to use in your day-to-day life. And those technological advancements are what creates real wealth.

Technology makes it possible to divide labor and makes better use of our time. In a primitive society (assuming it depended on fishing to eat), all people would be busy fishing because each individual can barely feed himself and his family. However, once the technology of fishing nets are discovered, only a handful of people would become fishermen and the rest would go about their day trying to make other kinds of products that they desire or need. Those individuals can then trade their products with the fishermen to satisfy their hunger, and the fishermen would have excess fish and food that they would be glad to trade their fish for the other services that have now become possible due to the process of freeing up people's time to provide new services. In this scenario, those new products -that were not possible before- are how a society as a whole become more wealthy and prosperous than another society that is not using that technology.

In other words, the technology of fishing nets freed up the time of the people in that society. They can now think about philosophy, make up theories about geometry and math, or make scientific discoveries. All of these endeavors would consequently be used to invent new technologies that would bring that society even more technological advancements that is needed to create more wealth.

Some people worry that improved technology like automated industries are not good because then the people who worked in those factories would lose their jobs. But in reality, this is how real wealth is created; Those people are now freed up and can make better use of their productive capacity and employ that capacity in new services that were not possible before, or in places they are needed more. Those automated industries can now produce more products in less time at a cheaper prince, and the workforce is now available to provide their services in other products and services.

Technology does have the short-term effect of causing some people to lose their jobs. Another example is the email. The mailman might be upset that his job is now obsolete since people can now use the email, but if every new technological advancement had to be discouraged due to it's short-term impact on a small sector of individuals nothing would ever be accomplished.

Wealth creation generally tends to improve society as a whole. And the wealth distribution generally remains roughly constant among different sectors of society like say, business owners and employees. The wealth gap might increase, but this should not be considered as a serious problem.

To give a numerical example, let's suppose that a certain sum of money is going to be divided between you and another person (say, 30% to you and 70% to the other person). In that setup, which is better: Splitting 100$ such that you get 30$ and 70$ for the other person?! Or splitting 1000$ such that you get 300$ and 700$ for the other person?! If you focus on the wealth gap, you would conclude that splitting a 100$ is better because the gap is 40$ compared to 400$. On the other hand, if you focus on absolute wealth you conclude that splitting 1000$ is better because you got more money. [Of course, we should not focus on paper money, but real wealth in terms of products and services, but let's assume that the purchasing power of money in this example is constant.]

Empirical evidence generally shows that the best way to improve the quality of life for all people (regardless of economic class) in the long-term is not to redistribute wealth, but to increase the wealth of the nation in absolute terms. Wealth does naturally flow around, and the more wealth that exists the more there is to go around.

It is a known fact (although not commonly understood and sometimes deliberately ignored) that socialism and communism have negative impact on real wealth. Socialism destroys real wealth (for many reasons that will be explained in later posts), and in the long-run all wealth would ultimately be destroyed, leaving society in dire poverty in terms of absolute wealth. One of the reasons is that our wealth depends on our capacity to transform raw materials found in nature into useful products that we can use in our everyday life. Socialism and communism interfere with the natural mechanisms that enables us to put natural resources into their most efficient use. This in turn would turn the natural progress towards more wealth in the opposite direction of less wealth, until wealth runs out completely.

Thursday, July 26, 2012

Libertarianism: Grounds Up Formulation

Introduction and Basic Definition:
In this post, I will informally describe the philosophy of libertarianism from the basic foundations. This is not meant to be comprehensive definition and analysis, however it presents the philosophy from it's foundational principles.

The beauty of libertarianism is it's simplicity. It is the simplest political philosophy to understand, because it rests essentially on a single axiom. Everything else is made through extrapolation from that single axiom.

The axiom of libertarianism is self-ownership: You own yourself. Your body is your property.

Owning property means that you have an exclusive right to control and make decisions about the use and function of the property you own.

With that in mind, this means by definition that owning your body means that you have an exclusive right to control and make decisions about the use and function of your body. Your body is the first property you own once you are born.

By careful analysis and study of the implications of the concept of self-ownership, we reach three further theoretical constructs that are conclusions from the axiom of self-ownership. Theory of property rights, theory of contracts, and theory of crime. I will not go into details of how those theories are formally derived from the concept of self-ownership; I will address that in future posts. Let's briefly discuss those theoretical constructs.

The Theory of Property Rights:
The major question of property rights is how does a person go from owning one property (his body) to owning external things in the world. There are two principles that need to be in place to answer this question.

1- The homesteading principle: The homesteading principle describes how a person might acquire what is previously unowned by anyone else. The principle states that a person gains property by mixing his labor with nature. Since a person owns his body, he also owns his labor. This means that a person can appropriate those parts of nature which he invested labor in.

2- Legitimate title transfer: The legitimate title transfer describes how one person might acquire the legitimate property of another person. A legitimate title transfer is defined as a voluntary transfer of property authorized by it's legitimate owner. There are many ways to transfer property: Giving someone a gift; Exchanging items through trade or barter (buying and selling); Inheritance; Or contractual agreements; All of these are examples of legitimate title transfer.

The Theory of Contracts:
Contracts are necessary to ensure securing property rights. Contracts can be simply understood as future (possibly conditional) property rights. For example, if you lend your friend a sum of money on the condition that they return it next week; This means that you have a right to that sum of money next week to be provided by that same person. If you buy an item on eBay, this means that you have a right to receive the item in question in the future. If you make a bet with someone on the outcome of a football match, it means that the property rights to certain sums of money are conditional upon the unfolding of a future event.

Contracts are important because they provide the necessary tools to secure property rights. In the case of lending someone a sum of money, the lender would have only agreed to voluntarily give up his property under the conditions of the contract. Violating contracts is a violation of the terms of the voluntary exchange under which one party agreed to transfer the property in question.

The Theory of Crime:
In libertarianism there is one -and only one- type of criminal activity: Violations of the property rights of others. In other words, any activity that violates the property of another person is a crime. Any activity that does not violate the property of another is legal.

In this understanding, we see that crimes generally fall under one of three broad categories of property crimes:

1- Crimes against property of the self: Since by definition every person owns his body, then violating the property rights of the body is a crime. Murder, rape, or physical violence are all crimes against the property rights of that person in his body. Murder, rape, and violence are akin to vandalism of the property rights of others.

2- Crimes against external property: Theft and vandalism are crimes against the property rights of others in external objects in the world.

3- Breach of contract: Since contracts are future property rights, thus breaching contracts is akin to theft in retrospective regard.

Libertarian Analysis of Some Political Issues:
The libertarian perspective is utterly simple as has been discussed earlier. All rights are essentially property rights. And all crimes are property crimes, and anything that is not a property crime should be legal.

Should murder be legal?
Murder is a violation of the property rights of individuals in their own bodies. Murder should not be legal.

Should rape be legal?
Rape is a violation of the property rights of individuals in their own bodies. Rape should not be legal.

Should slavery be legal?
Slavery violates the property rights of the individual slaves to control and decide the use and function of their bodies. Slavery should not be legal.

Should theft be legal?
Theft is a violation of the property rights of individuals in their legitimately acquired property. Theft should not be legal.

Should free speech be legal?
Speech does not violate the property rights of any individuals. All speech should be legal.

Should refusing to pay rent be legal?
Refusing to pay rent is a breach of contract. It violates the property rights of renters through retrospective theft. In other words, that person was given conditional rights to use the rented house, and not satisfying those conditions means that this person was retrospectively illegally using the house which they refused to pay the rent for.

Should homosexuality be legal?
Since individuals are the owners of their bodies, individuals have exclusive right to control and decide the use and function of their bodies. Consequently, they have unrestrained right to practice sexuality with any consenting individuals. Consent is required because without it, it would be a property crime (rape).

On the other hand, banning the practice by means of force or violence is a crime, since it is a violation of the property rights of individual homosexuals in their bodies, and their rights to control and decide the use and function of their property.

Should prostitution be legal?
Prostitution similarly is an exercise of the property rights of the prostitute with respect to her body. Prostitution is a legitimate contract since it does not violate the property rights of any individuals.

On the other hand, banning the practice by means of force or violence is a crime, since it is a violation of the property rights of the individual prostitutes in their bodies, and their rights to control and decide the use and function of their property.

Should drugs be legal?
Buying and selling drugs is a legitimate title transfer of property. The use of drugs by itself does not violate the property rights of anyone, thus it should be legal. The individual has the right control and decide what goes into their bodies.

Should driving under the influence of alcohol or drugs be legal?
This is a borderline issue. While drunk driving is not, in and of itself, a crime, it significantly increases the chance of committing a crime (namely, involuntary manslaughter). This question and other similar questions like "Should polluting the environment be legal?" require analysis of the theory of externalities; A theory I have not discussed in this post. The theory of externalities basically deals with indirect violations of property rights. For example, selling expired food imposes an externality on individuals whose health is damaged by such a practice.

Final Remarks:
There is a common saying that goes: "All you need to know about libertarianism you learnt in kinder garden: Don't hit other people, don't take their stuff, and keep your promises." - That is indeed all you need to know to understand the philosophy of libertarianism.

Tuesday, July 24, 2012

Ayn Rand VS Jesus: Love

{5:44} But I say unto you, Love your enemies, bless them that curse you, do good to them that hate you, and pray for them which despitefully use you, and persecute you; {5:45} That ye may be the children of your Father which is in heaven: for he maketh his sun to rise on the evil and on the good, and sendeth rain on the just and on the unjust. {5:46} For if ye love them which love you, what reward have ye? do not even the publicans the same?

source: The Christian Bible / Matthew 5:42-46 (PDF)

When it comes to love, the highest of emotions, you permit them to shriek at you accusingly that you are a moral delinquent if you’re incapable of feeling causeless love. When a man feels fear without reason, you call him to the attention of a psychiatrist; you are not so careful to protect the meaning, the nature and the dignity of love.

Love is the expression of one’s values, the greatest reward you can earn for the moral qualities you have achieved in your character and person, the emotional price paid by one man for the joy he receives from the virtues of another. Your morality demands that you divorce your love from values and hand it down to any vagrant, not as response to his worth, but as response to his need, not as reward, but as alms, not as a payment for virtues, but as a blank check on vices. Your morality tells you that the purpose of love is to set you free of the bonds of morality, that love is superior to moral judgment, that true love transcends, forgives and survives every manner of evil in its object, and the greater the love the greater the depravity it permits to the loved. To love a man for his virtues is paltry and human, it tells you; to love him for his flaws is divine. To love those who are worthy of it is self-interest; to love the unworthy is sacrifice. You owe your love to those who don’t deserve it, and the less they deserve it, the more love you owe them - the more loathsome the object, the nobler your love - the more unfastidious your love, the greater the virtue - and if you can bring your soul to the state of a dump heap that welcomes anything on equal terms, if you can cease to value moral values, you have achieved the state of moral perfection.

The degree of your ability to live was the degree to which you broke your moral code, yet you believe that those who preach it are friends of humanity, you damn yourself and dare not question their motives or their goals.

Ayn Rand

Saturday, July 21, 2012

The Morality of Seduction: Is Redistribution of Wealth Moral?

Libertarians generally believe that the actions of government should follow the same ethical principles that private individuals follow. It is generally believed that theft is unethical. Assuming that theft is immoral, should redistribution of wealth through government be considered moral?!

The morality of seduction is the principle that moral human relationships are voluntary interactions (some libertarians do call themselves voluntaryists). The morality of rape is the idea that moral human relationships can be coercive by the use of force. Is redistribution of wealth consistent with the morality of seduction or the morality of rape?!

See this video of Economist Walter Williams making the moral case against the redistribution of wealth.

Wednesday, July 18, 2012

To Think or Not To Think

"I exist, therefore I'll think."

"Devotion to the truth is the hallmark of morality; there is no greater, nobler, more heroic form of devotion than the act of a man who assumes the responsibility of thinking."

"Man’s mind is his basic tool of survival. Life is given to him, survival is not. His body is given to him, its sustenance is not. His mind is given to him, its content is not. To remain alive, he must act, and before he can act he must know the nature and purpose of his action. He cannot obtain his food without a knowledge of food and of the way to obtain it. He cannot dig a ditch – or build a cyclotron – without a knowledge of his aim and of the means to achieve it. To remain alive, he must think.
But to think is an act of choice. [...] In any hour and issue of your life, you are free to think or to evade that effort. But you are not free to escape from your nature, from the fact that reason is your means of survival – so that for you, who are a human being, the question ‘to be or not to be’ is the question ‘to think or not to think’."

"Man must obtain his knowledge and choose his actions by a process of thinking, which nature will not force him to perform."

Ayn Rand

Economics and The Theory of Value (2)

Profit in the Subjective Theory of Value:
In the previous part, we discussed Karl Marx's theory of exploitation, and the thesis that profit is made though exploitation of one person of another. The subjective theory of value provides an alternative explanation of how profit is made in trade.

Let's review the story of Mr. Jesus Lover and Mr. Jesus Hater discussed earlier. In that story, Mr. Jesus Lover got a T-shirt as a gift with "I hate Jesus" written on it. Mr. Jesus Hater got a T-shirt as a gift with "I love Jesus" written on it. In this scenario, both of these individuals have negative valuation of the items they have.

Unlike our previous example, in this scenario, those individuals don't know each other; So, they are not going to engage in direct trade. Instead, let's suppose there is Mr. Trader. Mr. Trader meets Mr. Jesus Lover and offers him 6$ to get that shirt. Later, Mr. Trader meets Mr. Jesus Hater and offers him another 6$ to get that shirt from him.

Note that each of these trades are good bargains for these individuals, since for each of them, the shirt they have is worthless; But now each one of them has 6$ instead of a worthless shirt!!

Suppose now that Mr. Trader puts these shirts on sale. He offers both shirts for 10$. Let's assume that Mr. Jesus Lover values the first T-shirt for 12$, and Mr. Jesus Hater values the second T-shirt for 12$ also. Both of these individuals visit Mr. Trader's shop and buy their favorite shirts for 10$.

Let's examine what happened with this step-by-step table:

As we can see, Mr. Jesus Lover started out with a worthless shirt and 10$ in his pocket. He ended up with a shirt he subjectively values at 12$ and 6$ in his pocket. Giving him a total of 18$ in value. Mr. Jesus Lover has gained the equivalent of 8$ in this process!!

Mr. Jesus Hater started out with a worthless shirt and 10$ in his pocket. He ended with a shirt he subjectively values at 12$ and 6$ in his pocket. Mr. Jesus Hater gained the equivalent of 8$ in this process.

Mr. Trader started out with 12$ in his pocket, and ended up with 20$ in his pocket. Mr. Trader has made a profit of 8$ as well...

As a total for all people involved, we started with the equivalent of 32$ in value, and ended up with the equivalent of 56$ in value. The net gain for all people involved is the equivalent of 24$... Also, note that each step in this process increases the amount of value in the system, because each step is itself a positive-sum game as the people involved wouldn't trade unless each one of them subjectively views the trade as profitable.

By understanding this scenario, we learn three very important lessons:
1- In trade, everyone involved is a winner.
2- Trade CREATES new value.
3- In trade, profit is made in the process of different subjective valuation of the same commodities.

In our scenario, Mr. Trader profited from the process of transferring the ownership title of the two shirts, from the individuals who least wanted those items, to the hands of those who most wanted those items.

In technical economic terminology, profit is made by efficient allocation and reallocation of resources. In our example, the trader served to reallocate the existing resources (the shirts), from it's inefficient initial allocation (as worthless shirts) to their more efficient allocation (valued shirts).

Labor is a resource just like any other resource in the market. And business owners maximize their profit by allocating labor to it's most efficient use. This might not be easily understood as the trading example, and I will elaborate on this in future posts.

Trade brings profit by increasing the efficiency of allocating resources. In the T-shirts example, profit was made by goods simply exchanging hands. But, this is not the only way trade is beneficial. Trade also improves efficiency by conserving resources. See video below as another example of how trade increases efficiency of allocating resources in a more concrete sense.

In this series:
Economics and The Theory of Value (1)
Economics and The Theory of Value (2)
Next: Economics and The Theory of Value (3)

Monday, July 16, 2012

Re-Evaluating Discrimination

Economist Walter Williams gives great lecture about the common myths and misunderstandings about discrimination.

Watch the full lecture, titled "How Much Can Discrimination Explain?".

Saturday, July 14, 2012

Economic Freedom and Personal Freedom

In politics, views are usually divided into right-wing and left-wing politics. However, this 1-dimentional division does overlook some critical differences in political views. One important distinction is economic freedom and personal freedom.

The general trend is that the right-wingers (conservatives) usually support economic freedom, but suppress personal freedom. On the other hand, left-wingers (social liberals) usually support personal freedom, but suppress economic freedom. However, this left-right dichotomy makes people unaware of the existence of those distinctions.

Instead of a 1-dimentional political spectrum, a 2-dimentional political spectrum is usually used. Some people have devised 3-dimentional political spectrum, but that is beyond this post. What this political spectrum shows is the distinction of the classical liberals (usually called "libertarians" to avoid confusion with the more widespread social liberals). Classical liberals support BOTH economic freedom and personal freedom; That is because classical liberalism is based on the idea of least government control in people's lives.

Take this short test to see where you fall on the political spectrum.

On this diagram, notice the personal freedom score and the economic freedom score. In this diagram, going from right-to-left measures how much your views oppose tradition. Right being most traditional, and Left being most opposed to tradition. On the other hand, going from bottom-to-top measures how much you believe that government should control people's lives. The bottom means you believe government should take complete control in people's lives, and top means you believe government should not control people's lives.

To learn more, check those two YouTube videos:
Economic Vs. Civil Liberties
Who favors more freedom, liberals or conservatives?

Monday, July 09, 2012

Economics and The Theory of Value (1)

An important concept in the theory of economics is the theory of value. Unfortunately, numerous economical theories have misguided theories of value. The prevalent theory of value in the 19th century is called "The labor theory of value" and most economists of that time used that theory of value.

Karl Marx in his formulation of the economic system of communism had made five fatal flaws in making in his theories. Those flaws are:
1- Using the labor theory of value.
2- Lack of understanding of information propagation and signaling in the market.
3- Lack of understanding of the role of discovery, learning, and creativity in the market.
4- Misinterpreting the direction of history (historical materialism).
5- Lack of understanding of the laws of causality (the relationship between cause and effect).

In this post, I will address the first topic, namely the theory of value. Hopefully, in future posts I will address the rest of the flaws in Karl Marx's theory of economics. Please note that most of the flaws in Karl Marx's theory were result of poor understanding of economics in the 19th century, so this post is not meant to question the intelligence of Karl Marx, but rather review his theory in the light of advances in economic theory in the 20th and the 21st century.

The Labor Theory of Value:
The labor theory of value states that the value of a commodity is proportional to the amount of labor that went into the production of that commodity. This means that any two commodities that had the same amount of labor invested in them should be equally priced, and sold for the same price. Similarly, if twice the amount of labor went into one commodity, then it's price should be double.

The labor theory of value is part of a sub-class of theories of value, called objective theories of value. Objective theories of value are those theories that state that commodities should have a specific value (and consequently specific price). Labor is one of the metrics that objective theories of value use.

The Subjective Theory of Value:
The subjective theory of value state that the value of a commodity is subjectively determined by both producers and consumers.

To illustrate the flaws of the labor theory of value, let's consider this example:

Let's assume for the sake of argument, that the same amount of labor went into the production of those two T-shirts. Do both T-shirts have the same value?! Certainly not! For a person who loves Jesus, the second T-shirt has negative value. That is to say, that person would not take the second T-shirt even if it was offered for free! Different people would have different valuations for the same commodity. This means that objective theories of value are all necessarily false including -among others- the labor theory of value.

Trade is a Positive-Sum Game:
A positive-sum game is the type of game where the sum of values of all players after the process is larger than the sum of values of all players before the process.

Let's consider an example of a zero-sum game to illustrate the meaning of the term. Let's say that two friends make a bet on the outcome of a football match, such that the loser of the bet would pay the winner of the bet 10$. This is a zero-sum game because in order for one person to gain 10$, the other person has to lose 10$. So, the winner had 10$ before, and 20$ after. The loser had 10$ before, and 0$ after. The sum of money before was 10$+10$ = 20$, and after is 20$+0$ = 20$.

Since, the difference in the amount before and after is zero, then it is a zero-sum game. In other words, in a zero-sum game, in order for one player to gain a certain amount of value, the other player must lose an equal amount of value.

Sexual intercourse is a good example of a positive-sum game. Both parties involved in a sexual interaction gain satisfaction. In other words, it is a win-win situation, where all players gain value.

Is trade a zero-sum game? Positive-sum game? Or negative-sum game?

If we assume that commodities have a fixed objective value, then trade is a zero-sum game. If PersonX owned ItemX and PersonY owned ItemY, and those items had fixed objective values, then a trade will not change the sum of values in the system.

However, when we assume the subjective theory of value, we see how trade is a positive-sum game. To illustrate that, let's go back to our T-shirts example. Say, Mr. Jesus Lover got the "I hate Jesus" T-shirt as a gift. And his friend, Mr. Jesus Hater got the "I love Jesus" T-shirt as a gift. Both of these individuals have negative valuation of the items they received. On the other hand, they both have positive valuation of the item their friend has received.

Let's say, Mr. Jesus Lover proposes a trade to Mr. Jesus Hater. Let's consider the conditions on which this trade will be successful.
1- Mr. Jesus Lover values the shirt his friend has more than he values the shirt he already has; Otherwise, he wouldn't have proposed the trade in the first place.
2- Mr. Jesus Hater values the shirt his friend offered more than he values the shirt he already has. If he did not value it more, he would refuse to make the trade.

From (1) and (2), we can easily see that voluntary trade is necessarily a positive-sum game.

Karl Marx's Theory of Exploitation:
I am not going to explore Marx's theory of exploitation in full, it is a mathematically intensive theory. But what is important to realize, is that the whole theory is based on the labor theory of value, and that trade is a zero-sum game.

According to the theory of exploitation, every trade is either neutral or exploitative. So, if two individuals enter into a trade, they are either going to trade items of equal value, or trade items of different values. In the case two people trade of items of different values, the person who got the more valuable item is an "exploiter", and the person who got the less valuable item is "exploited".

Then Marx focused on the trade between a business owner (the capitalist) and the employee (proletariat). And then went on to prove that the wages employees get is necessarily exploitative. In other words, employees are always exploited.

The proof is relatively simple. The price at which a product that is sold on the market equals the amount of labor that went into making the product. So, the only way the business owner can make a profit is to pay his employees less than the true value of their labor. So, the only way a business owner can make any profit whatsoever, is by exploiting his employees. And the more profit a business owner makes, the more exploitative his wages are.

To give a numerical example, let's say a cars factory owner bought the raw materials (steel and other raw materials) for 200$. This 200$ is the value of labor required to mine those raw materials. He then hires one worker to assemble a car in his factory. Later, the factory owner sells the car for, say, 1200$. According to the labor theory of value, the price of the car (1200$) is the value of the total labor that went into the production of the car. The value that the worker at the factory added is 1000$ (since 200$ was the price of the raw materials). So, if the factory owner gives his worker 800$ as a salary, and keeps 200$ as profit, then the factory owner has exploited his worker by not compensating him for 20% of his labor (200$ of the 1000$).

It can be easily seen, how in the labor theory of value, any profit a business owner makes is necessarily an act of exploiting his workers. Fortunately, it is obvious that the labor theory of value is not a valid assumption to build a theory.

It is also important to note that, Karl Marx's theory of historical materialism is derived from his theory of exploitation, and so, that theory as well needs to be put in question.

In this series:
Economics and The Theory of Value (1)
Economics and The Theory of Value (2)
Next: Economics and The Theory of Value (3)

Sunday, July 08, 2012

How Good Is Greed?!

Is greed a virtue or a vice?! Economist Walter Williams believes that greed is the noblest of human motivations... I happen to agree, do you?!

See this video of Walter Williams explaining the virtues of greed.