Oct 122012

Another round of amateur verbal pugilism. The challenger is in italics, my replies in not-italics.

Higher cost items include a higher profit which can employ more people. For example, when I worked at a car dealer, a new base model jeep wrangler had $99 in profit for the salesmen. A fully loaded had $8,000 in pure profit. Therefore, a wealthier person choosing the fully loaded model gave more in profit to the dealer enabling him to support a greater staff, from mechanics to detailers to office staff.

You are assuming that money is the same thing as wealth. This is a common mistake, and it is wrong. The dealership charges a premium on luxury goods, so it’s able to extract more profit from the fully loaded model. However the difference in actual wealth between a fully loaded Jeep and base Jeep is very small. You are implying that a fully loaded Jeep is equivalent to 80 base Jeeps (as it is, in terms of profit-to-salesman). Are you actually claiming that society is as enriched by the production and use of one fully loaded Jeep as it would be by the production and use of 80 base Jeeps? If not, can you see where you went wrong?

It’s a two-part problem. The first being that a salesman’s ability to extract profit is not equal to the utility of an item. If we’re talking economics, it’s utility we’re interested in. The second is that the $8000 isn’t magically lost if it’s not spent on the Jeep. It would be spent in some other part of the economy, and thus would pay for someone else’s salary (maybe the ski resort employee, or the diamond miner). It’s an example of the Broken Windows fallacy.

Thats a curious way to mis-understand my statement. You are somewhat correct in stating that money is not the same as wealth, but wealth is not wealth unless it can be converted into a currency. I was also addressing A*****’s situation as she lives in Denver and not Detroit. As such, it matters little to her how many jeeps are created, only what is sold locally and only that portion of profit which is kept locally. For assuredly there is profit in the jeep for the plant, but that money is removed from the local economy and little of that will find its way back to the people of Colorado.

I also fail to see where I claimed that 8000 would be lost if it wasn’t spent on the jeep. Rather, I was pointing out that a wealthier person would be more likely to spend that additional money which would support more local jobs. It matters little on what that money is spent on, just that it is being spent. Be it Burger King, a week in Vail, a yacht, or popcorn at the movie theater. It all supports jobs. Some good, some not so good, but jobs none the less.

No, wealth is wealth. Wealth is what we want. Currency simply facilitates trade by making that wealth easier to exchange between arbitrary products/services.

The focus on locally-kept profit is interesting. It’s certainly the best way to approach the issue if your goal is short-term political or personal gain. From a more economic point-of-view, the most important fact is that we (as a society) created one more Jeep of wealth. Capturing the profits from its sale locally may be a business or political concern, but it doesn’t have much to do with econ.

Upon further reflection, it does pose interesting economic questions (I had to step away from the keyboard for a half hour). The salesman/dealership spent almost the exact same amount of labor transporting & selling both the base and luxury models. Society gets near the same utility from a base and a luxury model. Why are the salespeople compensated so much more for the luxury line? My own answer would have something to do with the diminishing marginal utility of a dollar and the accompanying inefficiencies of concentrating a lot of money into a small number of hands. But I have my biases. :)

You didn’t claim that the remaining $7900 would be lost, but it is implied with your statement of ‘that extra profit can be used to support a greater staff, etc’. The implication is that without that extra $7900, there wouldn’t be money to hire more people, and less jobs would be created. While that’s true *of the dealership*, it’s not true as a whole. The jobs would simply be somewhere else, where the money was spent instead. That’s why economics doesn’t focus as much on whether profit is captured locally (such as at the local dealership). Locality is relative. Overall wealth creation is the greater concern.

You claim that a wealthier person would be more likely to spend that additional money which would support more local jobs. This is actually the opposite of the case – typically the wealthier someone is the more they save, and the poorer someone is the more they spend immediately. But this isn’t a good argument for my side, since savings are largely re-introduced into the economy as investment. Mainly I’d like to see a bit more consistency. The “it all supports jobs” line in this comment is in opposition to the “ a wealthier person choosing the fully loaded model gave more in profit to the dealer enabling him to support a greater staff” line in the previous comment. Please pick a position.

 Leave a Reply

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>