In chapter seven of Institutional Economics, Commons writes about the related issues of efficiency and scarcity. He is writing because of his great concern over the confusion of wealth and its double meaning. The first meaning of wealth he defines as the issue of maximizing the production or productive value of assets. This production is done by engineers and scientists irregardless of the price system or price signals. He discusses that this first notion of wealth relates to human control over nature. As we get better at production via technology and ideas, we expand our control over nature. The engineering economy is based on inputs and outputs and maximizing the one relative to the other. He focuses on man hour inputs versus use value outputs. Wealth is defined as the creation of goods and services with use value. He also fully explain the need to skip dollar values as the measuring stick in the engineering economy.
The second meaning of wealth he redefines as assets. Here we are talking about one persons control over another person in the marketplace. This is the proprietary economy of bargaining transactions. In this view, the goal is to have or create scarcity to maximize profits and not production. This is the economy of the business person or entreprenuer. Here, income is the measuring stick and the difference between dollar based income and outgo. A key question is the distribution of the net income to the various parties to the going concern.
Commons goes to great pains and close to one hundred pages making this distinction and clarifying this dual meaning of wealth. The reason for this lengthly narrative is because he believes that this confusion has lead many schools of economics astray since the 1790's. Ultimately, he will also argue that this confusion leads to poor policy advice.
The second meaning of wealth he redefines as assets. Here we are talking about one persons control over another person in the marketplace. This is the proprietary economy of bargaining transactions. In this view, the goal is to have or create scarcity to maximize profits and not production. This is the economy of the business person or entreprenuer. Here, income is the measuring stick and the difference between dollar based income and outgo. A key question is the distribution of the net income to the various parties to the going concern.
Commons goes to great pains and close to one hundred pages making this distinction and clarifying this dual meaning of wealth. The reason for this lengthly narrative is because he believes that this confusion has lead many schools of economics astray since the 1790's. Ultimately, he will also argue that this confusion leads to poor policy advice.
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