Value Creation and the Supply Side
The Seen and the Unseen
In chapter five of The Seen, the Unseen, and the Unrealized, Bylund discusses the main aspects of what creates value using the “multiplier effect” and different analogies that explain the initiation of exchanges and their opportunity costs. In relation to all the other chapters that we have read so far, Bylund (2016, p. 73) mentions that exchanges must create value because consumer satisfaction is increased. We also do not initiate trades without seeing value in the other product, and this in exchange helps entrepreneurs determine what products to make and the quantity supplied.
Bylund goes on to explain the opportunity costs involved in exchanges. The analogy of the shopkeeper and his son does a great job of explaining this opportunity cost. When the son breaks the shop window, the shopkeeper has no choice but to replace the window. With that money he used to replace the window, he could have bought something else that would have created value to him, but instead he had to buy the window because it was more important at the moment. The opportunity cost is the value forgone by another alternative. We experience this opportunity cost so often, making decisions even more difficult because we have to determine which alternative will bring us the highest value. Just the other day, I had money set aside to go eat a nice dinner with my friends. However, something was spilled on my car that could have potentially damaged it if I did not get it cleaned off. Instead of using my money to go have fun, I had to use it to get a car wash. The opportunity cost of the car wash was having fun with my friends. Like the scenario with the shopkeeper, I could have used that money for something better, but the value of getting my car washed like fixing the window in Bylund’s analogy was more important at the moment than the alternative.
In addition to opportunity costs, this scenario explains the multiplier effect.
“The “multiplier is based on the concept of economic activity, that is on the production and exchanges that are made within an economy and for economic purpose. Increased activity, as it includes both voluntary trade for mutual benefit and production of goods and services (which, if sold, are valuable), is supposed to approximate value creation and therefore is directly linked with economic growth” (Bylund, 2016, p.77).
When replacing the window, the shopkeeper is supporting someone else, specifically the person who sells him the new window. This boosts economic activity because he is supporting another business that gains value from that purchase and can profit from this accident. Bylund explains that the multiplier works through the glazier in this instance, but if the window wasn’t broken, then the multiplier would work through the shoemaker to buy shoes (2016, p. 78). In my instance, the money was given to the car wash to boost their activity, but if I would have used the money for food, then the multiplier would have worked through the restaurant. “The seen” is the problem at hand that is visible, the broken window and dirty car, and the unseen is the “invisible hand” of the market economy moving by value creation and restoration when purchasing new products.
The final point made in this chapter is that destruction influences opportunity cost but is indifferent to the “multiplier” effect.
“The “multiplier” effect acts in both the seen and the unseen, and unless we know that destroying the window will lead to a much higher fraction of consumed/reinvested income in the chain of actions that begin with the glazier than the chain of actions that begin with the shoemaker, then both effects are approximately the same” (Bylund, 2016, p. 80).
The multiplier effect will work either way due to economic boosts from purchases because that money was going to be spent no matter what. However, the value between the opportunities differs based on the importance of the options.
Taxation and Regulation
Following the same themes of chapter five, chapter seven in The Seen, the Unseen, and the Unrealized brings up the new topic of regulation. While Bylund talks about destruction and its effect on the economy and production because there is less capital available to resume full activity, regulation follows a similar theme but on a different scale.
“…policy is intended to completely do away with certain types of production, perhaps because they are considered illegitimate or harmful, or alternatively limit their production, and thus steer production toward the production of different types of goods” (Bylund, 2016, 101).
There are two types of regulation: ineffective that does not bring about change and effective that does and influences production and activities in the market according to Bylund (2016, p. 102). Ineffective regulation does nothing for the economy and is therefore pointless to enact if no one is going to comply with it. The purpose of regulation is to bring about changes that effect the market. The examples that Bylund used involve all the scenarios from other chapters to help explain this. I really liked the example of Adele and her apple-growing to explain effective regulation. If the law states certain conditions in one area but Adele is in another area, then the regulation is ineffective for her because it does not change her production. Bylund (2016, p. 103) says that it is possible for businesses to fall outside the law’s scope, but that it is possible for the law to tailor regulations for certain businesses. I believe that this is unfair, but we see this happen everywhere even if policy makers do not intend for it to happen. For this reason, we see businesses move their location to avoid policies in specific areas so that they can continue production as usual.
Next, Bylund discusses the impact of regulation. Bylund (2016, p. 109) says that the most intuitive type of steering production is offering positive financial contributions to businesses after certain choices are made to cover costs. This is a nice thing that the government does when they see something that is environmentally friendly and support others to use the product. It is essentially their cause that contributes to business’ demand for products, so it is good for them to help cover the expenses they placed on the companies in order to keep up with production. However, regulation is not as good to businesses as this incentive may be. When the government lowers taxation for the product they support, they can also impose taxes on the products that compete with it so that consumers will choose the cheaper product. The final form of regulation that Bylund mentions is prohibition.
“Prohibition is different because this type of regulation not only changes the cost structure but in fact affects the overall choice set: the alternatives available for entrepreneurs to choose from” (Bylund, 2016, p. 111).
Prohibition affects businesses in a different way because they must comply with the laws and potentially change their whole business. When a law is created to stop the production of a certain product, the business has to figure out a new plan for revenue. If they cannot do anything to comply with the law, then they must close their business and their employees must find other jobs. This, however, increases the production of alternative businesses because they now have more consumers due to the loss of a business, and they also have more employees. Bylund calls this “ripple effects” because as one event happens, another follows shortly after in a never-ending cycle (2016, p. 114).
Conclusion
Bylund was thorough in his explanations on value, taxation, and regulation in the economy. I have never realized the impact of governmental laws on businesses and how these effects ripple through the market. When a business is no longer able to support themselves, other businesses excel because they gain customers from the former business. Value plays a role in this instance because entrepreneurs find value in their business the same way that consumers find value in products. Everything is intertwined to create the market economy that we work and live in.
Resources
Bylund, P. L. (2016). Chapter 5: The Seen and the Unseen. In Seen, the unseen, and the unrealized: How regulations affect our everyday lives (pp. 73–82). essay, Lexington Books.
Bylund, P. L. (2016). Chapter 7: Taxation and Regulation. In Seen, the unseen, and the unrealized: How regulations affect our everyday lives (pp. 99–115). essay, Lexington Books.
Hi @brieb, I enjoyed reading your insights and thoughts on this week’s readings. You had really great viewpoints, as well as expressed some of the same thoughts and ideas that I had. To start, you explained the multiplier effect and Bylund's examples very well. I appreciated how you used this quote,
to support your understanding of the multiplier effect and how we see it in our society. You showed through this quote that when production and trade are successful, then purchasing of those products increases and business owners experience a multiplier effect. Not only are their goods purchased, but their goods become in high demand, profits are made, and we see growth in the economy. Also, your example of the carwash overhanging with your friends was an excellent example of this effect. You and I also both shared in our essays that the ripple effect influences our society in similar ways to the multiplier effect. Both concepts are similar because when people buy products there are multiple results as mentioned above, but we also see that there are positive ripple down effects for the people who sell items used in making the products, so it is beneficial for producers, sellers, and the buyer. Next, you discussed ineffective and effective regulation from chapter seven very clearly. We both agree how ineffective regulation does not bring change to the market and economy, while effective regulation does. As you mentioned, we often see this in our society today as businesses lean towards regulations and laws which work best for them. Lastly, you discussed prohibition in addition to these regulations and the effects they have on businesses. I agree that sometimes prohibitions and too strict regulations can have negative effects on businesses. Unfortunately, some businesses are not able to recover from either scenario because with prohibition there could possibly be an elimination of their product, or with regulations some are just too expensive to accommodate, and the business owner cannot afford to keep going. After reading your essay, I was able to gain a deeper understanding of these concepts and you did very well at discussing them.