Trade is almost always good.
I want to propose that as the central principle of economics. More on that in other posts. In this post, I want to talk about how trade might be bad or might be perceived to be bad.
1. If you hold a gun to my head and demand something, that is bad. In fact, I would say that does not even count as trade.
2. If I buy on the basis of fraud or deception, then the trade is bad. Florida swampland. Snake oil.
3. What if I was not deceived, but afterward I regret the trade? In 1964, the Chicago Cubs traded Lou Brock to the St. Louis Cardinals for Ernie Broglio. The Cubs came to regret that trade. I have made some investments that I regret. But in my view there is nothing unfair or morally wrong about trades that someone later regrets making.
4. What if you are in the desert in danger of dying of thirst, and I offer to sell you a bottle of water for $1000. Is that a bad trade? I would argue that what is bad is the circumstance in which you find yourself, but the trade itself is legitimate. I would argue that even more strongly in the case of buying clothing made in a sweatshop. Assuming that the worker chose to work in a sweatshop over other alternatives that were worse, it is not a bad trade. For more on this issue, I recommend this podcast with Russ Roberts and Michael Munger.
5. Is it bad to trade with people whose cultural or political views you dislike? A lot of people feel that way, but the opposite might well be true. Suppose that you choose to trade solely on the basis of profit. Clearly, that makes you better off. Also, by not discriminating against others on the basis of ethnicity or culture or politics, you are probably helping to make the world a better place.
6. In fact, trade is probably best when it is impersonal. The closer you are to a person, the more doubtful trade becomes. I would not recommend to parents that they pay children to help around the house. Instead, I would recommend telling children that you consider it their responsibility to help around the house (and being specific about what that means).
7. Trade involving a person’s body makes people squeamish. We do not want people selling themselves into slavery. Many people, although not all, oppose prostitution. Many people, although not all, oppose the sale of drugs like heroin or cocaine. Many people, although not all, oppose allowing people to pay for organs to be used in transplants. Among economists, there is more support for legalized prostitution, drugs, and a market for organs than there is in the general population.
8. It could be that one of the reasons that we rely heavily on third-party payments in health care is that we are squeamish about trade that pertains to the body. We prefer to think of the doctor as offering the gift of healing rather than as someone making a trade.
I sell someone a gun, and he shoots me.
I hire an immigrant at a lower wage than a native worker. He then has so many kids that he outvotes me in the democratic process, and the vote is to strip me of my citizenship and deport me.
Solution: only engage in trade when ridiculous hypotheticals are unlikely to become true.
I agree. When my parents asked me what economics really was about, I told them: I have many needs and wants. If I can find someone who is better than I am at a specific task, I should ask them to do it for me, and with my free time do something I’m better at, and compensate them. Barter, and eventually, money. If I do everything myself I will be poor and miserable. If I trade, I will be much better off. (I might still be poor and miserable, but not quite as much as before.)
So yes, in a word, voluntary trade (okay two words).
Re: doctor, interesting how people would have no trouble with bartering services (the doctor sees me, and in exchange I fix his roof), but they do have a problem with money as a medium of exchange (even in the extreme case where I fix the doctor’s roof, he pays me and I pay him the exact same amount so he can see me!)
If only all “trades” were voluntary, man wasn’t so power hungry, and I could eat bacon at every meal…
I wanted to make a point about forced “trades”, but that last “wish” about bacon made me think that indulgence is why economics is so muddy. The prudent, utility-maximizes behavior is to not indulge in short-term pleasures, yet if I can’t get bacon of my brain, or the superficial appearance of my neighbors lifestyle, I’m going to look for shortcuts in obtaining those things without trading anything, and that leads to vice and then that leads to state and forced “trade” all over the place. If I get to know my neighbor and discover I may have something he doesn’t have, then we can both be better off without involving the horribly blunt tools of the state.
Perhaps public psychiatric services might be one way to cut down on all the shortcut taking we see around us. “So, Bill, what makes you believe your neighbor is happier?”
The agency problem: in search of cheap labor for one industry, that cohort imports slaves. The economic and moral costs redound for hundreds of years on society at large.
A Gresham’s Law of goods: bad trade goods chase out good trade goods. Bad drugs; porn; gambling; and cheap knock-offs proliferate. It has been patiently explained to me that market mechanisms will ultimately correct these things; but it looks to me that bad moral actors can continually hack the system.
“If you hold a gun to my head and demand something, that is bad. In fact, I would say that does not even count as trade.”
Agree, repeal property law.
Suppose I walk onto a piece of the world. You claim that it’s yours. I disagree because God made the world for everyone. You then proceed to call the state, who puts a gun to my head and demands something, namely that I leave. That is bad.
Catallaxy for the win.
Whately saw this and it has been the central theme in mainline economics since.
An exchange is an exchange is an exchange.
An that is what makes friends.
The central problem of economics is that it’s adherents use the term “good” when they mean “increases GDP.” The two are not always identical (thanks God).
Stay out of philosophy and say what you mean. If you’d said increases GDP, you’d have been right. When you say it’s good, you’ve left the realm of social science and entered a whole different realm. Frankly, you’re rather insightful point gets lost in absurdities otherwise.
Those “bad” trades can increase GDP. So perhaps we mean “net utility.” But then we are approaching some conceptions of objectivism, and there we are right back in philosophy, such as it is.
So maybe it is just “voluntary trade is voluntary.”
I see no problem whatsoever in using the term “good” here
@Tom: Ok, but can you imagine someone who would see a problem with it, and who had moral views that you respected?
I’m having trouble doing it. We know about externalities and all the other mechanisms for when it is not “good.”
I also think about animals. I come down on the side of humans being objectively “good” because animals mostly just are.
No, I can’t respect such views. It’s like saying that it’s wrong to argue that opposable thumbs are good, and that we should just say that they help us pick up things.
That’s what I figured.
Three fundamental theorems of economics:
1. Voluntary trade increases humanity’s wealth. Each of us values what we have after the trade more than what we had before the trade.
2. Voluntary trade increases humanity’s wealth even if one party to the trade can outproduce the other party in everything that can be traded. Also known as the theory of comparative advantage.
3. Voluntary trade increases humanity’s wealth even if the rights to what is traded are initially allocated arbitrarily between the parties making the trade. Also known as the Coase theorem.
Indeed, each of these rules is anchored by “Voluntary trade increases humanity’s wealth,” so I’d say “Trade is almost always good” is a very good central principle of economics.
MikeP, what do you say about a future robotic world where capital doesn’t have to trade with labor?
It may cost more for the robot to make shoes versus shirts, while I can make shirts cheaper than shoes, but if the robot can make shirts for three cents an hour, I can’t even begin to match that market clearing price.
This video has been making the rounds.
I strongly recommend you don’t try doing what robots can do more cheaply. Indeed, if this robot plants cotton, harvests cotton, gins cotton, forms thread, dyes thread, designs cloth patterns, weaves cloth, designs shirt patterns, cuts cloth, sews cloth, tags shirts, launders shirts, markets shirts, negotiates shirt deals, transports shirts, and sells shirts — all for 3 cents per shirt — then that might be a hint that you should not be in the shirt business.
If, on the other hand, there are some aspects of making shirts that the robot cannot do, then the robot is giving you tremendous leverage by providing its services so cheaply and leaving lots of headroom in the final price of a shirt for your productive contribution.
The suggestion here is that robots have the potential to do EVERYTHING better than people: the Singularity, etc., relegating most of humanity to a well appointed ghetto.
That’s far too optimistic. If a digital emulation or equivalent to a human mind becomes a reality, then it’s game over for us organics.
The brain only requires half a kilowatt hour a day, and that’s using inefficient fragile-protein-based wetware for signal processing. If you use digital circuits to emulate that framework, it should only require a few watts, at a cost of less than a penny a day, and requiring only a few square inches of land for solar power.
Since an organic human can’t live on that, and the digital human can provide the same services in the economy, it will come down to a competition for survival over basic scarce resources, and the digitals will easily win, outbidding land from agricultural production, and making organic life completely unaffordable. No ‘well-appointed ghettos’, if it means that one organic human is sucking up the resources that could power millions or even billions of digital lives.
I’m with Handle. I don’t believe in the Singularity. But if machines ever do get to the point of building their own intelligence, they as well as humans will discover that the long pole is interfacing the human mind with the machine. The exponentially growing machine mind will soon find it much simpler to just leave the human out.
Short of the Singularity, I don’t see robots figuring out human fashion or human marketing in general better than humans. Would robots have known that Facebook would work where Friendster and MySpace didn’t? Given that, short of the Singularity, humans will always determine machines’ ends, there will always be a comfortable place for humans. Those who choose to live in the ghetto will find it well appointed indeed. Those who want something more can find a higher paying place alongside the robots helping serve the consumer demands of each other and the ghettos.
“[T]here is nothing unfair or morally wrong about trades that someone later regrets making.” But there might be something *bad*–probably bad only for one party to the trade (as in the Brock-Broglio example), but possibly bad for both. So your “central principle of economics”:
Trade is almost always good,
looks like a considerable overstatement.
Dr. Kling states that trade is almost always good. Consider good trades as increasing GDP (prosperity) and bad trades as reducing prosperity. Over the last 100 years, GDP has been almost always increasing. Hence trade is almost always good. (Replace “good” with “welfare-improving” if you want to nitpick.)
Some selling techniques approach 1, even if there is an exchange, so while regret, 3, alone may be insufficient, regret due to this manipulation may be. Under 4, trades based on monopolies are often bad, and voluntary becomes laughable under these conditions. Some things are more important than trade. Information asymmetry can make trade difficult, and that may be the reason for third party payments.