In his Letter to Shareholders (2008) [PDF], Warren Buffet wrote that his mentor said,
I'm an engineer and I use Microsoft Excel spreadsheet software a lot... I mean, I could use a slide rule or a calculator more cheaply than the $279 it costs, but it would require a lot more time and energy, perhaps losing out on potential customers.
I can create more wealth by paying only $279/year for the software... that's the price; but I can get to service more customers thereby achieving more income... that's the value. This difference... between value and price is the exact amount of wealth that got created.
While the producer desires as high a price as possible, the higher he raises the price, the fewer individuals can derive value from it - therefore the fewer people purchase the product/service.
While the consumer demands as low a price as possible, the lower the price goes, the financial viability of the producer becomes a risk - at some point, the producer is better off not selling and shuttering his operations than to continue.
When producers and consumers exchange in the absence of coercion, the price of goods and services settle at the maximum wealth for each party. This is exactly what the free-market is:
"Free" refers to the absence of coercion (i.e. one party does not have a gun and cannot compel the other party to transact against his will). "Market" refers to the place where producers and consumers transact. In fact, since most people are both producers and consumers, the free-markets is another way of saying free people.
As wealth is created when an individual gets more value than the price paid, the inverse is also true: wealth is destroyed when value is less than the price.
The reason governments cannot create wealth simply because the government has coercive power. They employ jailers and gunmen and should you find their products/services (e.g. War on Terror, TSA, etc.) of little value to you, they don't care: they force you to pay it anyway. In fact, the government is able to destroy wealth in vast amounts by allocating the budget towards products/services of no value to the taxpayer.
The litmus test for wealth creation is the absence of coercion when parties transact. All this talk of governments creating wealth is utter nonsense.
Price is what you pay, Value is what you get.
In this simple sentence, the whole mechanism of wealth creation is explained.I'm an engineer and I use Microsoft Excel spreadsheet software a lot... I mean, I could use a slide rule or a calculator more cheaply than the $279 it costs, but it would require a lot more time and energy, perhaps losing out on potential customers.
I can create more wealth by paying only $279/year for the software... that's the price; but I can get to service more customers thereby achieving more income... that's the value. This difference... between value and price is the exact amount of wealth that got created.
While the producer desires as high a price as possible, the higher he raises the price, the fewer individuals can derive value from it - therefore the fewer people purchase the product/service.
While the consumer demands as low a price as possible, the lower the price goes, the financial viability of the producer becomes a risk - at some point, the producer is better off not selling and shuttering his operations than to continue.
When producers and consumers exchange in the absence of coercion, the price of goods and services settle at the maximum wealth for each party. This is exactly what the free-market is:
"Free" refers to the absence of coercion (i.e. one party does not have a gun and cannot compel the other party to transact against his will). "Market" refers to the place where producers and consumers transact. In fact, since most people are both producers and consumers, the free-markets is another way of saying free people.
As wealth is created when an individual gets more value than the price paid, the inverse is also true: wealth is destroyed when value is less than the price.
The reason governments cannot create wealth simply because the government has coercive power. They employ jailers and gunmen and should you find their products/services (e.g. War on Terror, TSA, etc.) of little value to you, they don't care: they force you to pay it anyway. In fact, the government is able to destroy wealth in vast amounts by allocating the budget towards products/services of no value to the taxpayer.
The litmus test for wealth creation is the absence of coercion when parties transact. All this talk of governments creating wealth is utter nonsense.
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