Everybody Wins - Island of Sanity

Island of Sanity



Economics

Everybody Wins


A basic principle of free market economics is that if everyone is free to buy and sell as he chooses, then in every transaction, everyone comes out ahead.

Many people reject this statement as obviously impossible. How can two people trade cash or merchandise or whatever and both come out ahead? If Alice offers a widget for sale and Bob buys it for $10, the widget is either worth $10 or it is not. If it is worth exactly $10, then this was a fair deal: neither person came out ahead and neither was cheated. But if the widget is worth more than $10, then Bob came out ahead and Alice was cheated. If it is worth less than $10, then Alice came out ahead and Bob was cheated.

The problem with this analysis is that it assumes that every product has some fixed "value", that it is worth the same amount to every person at all times. A brief look at real human beings will quickly demonstrate that this is not true. Replace "widget" with some actual product. Say, a box of peanuts. To a person who likes peanuts, this box might be worth several dollars. To a person who hates peanuts, it has no intrinsic worth at all. (If you sold it cheaply enough he might buy it with the thought that he can sell it to someone else at a profit, but it still is worth nothing to him. He is only buying it to re-sell.) To someone who is allergic to peanuts, we might even say it has a negative value: He would be willing to pay you to take it away. To someone suffering from a protein deficiency or who is starving, it might have a very high value indeed.

Why would anyone engage in a transaction where he knows that he will come out exactly even? If someone offered to trade you one ten dollar bill for a different ten dollar bill, would you do it? Unless you had reason to believe that one of them was worth some amount other than $10 (perhaps because the one you have is counterfeit and therefore worth nothing), why would you bother to make such an exchange? It would just be a waste of time.

This doesn't apply only in the trivial case of identical products. Suppose one day you go to a furniture store with $100 in your pocket. The store has both a chair and an end table for this price. You find both equally useful and appealing. You see no way to decide between them, so you toss a coin to decide. Suppose you end up buying the chair. A few days later, absolutely nothing has happened to change your mind: you haven't found any flaws in the chair or discovered any new virtues in the end table. The store calls you up and asks you to bring back the chair and exchange it for the end table. Would you do it? Probably not, because as far as you are concerned, the two items have exactly equal value, so there is no reason to make such a transaction.

Because everyone attaches a different value to each product, in a free market people routinely are able to buy and sell things for other than the value of that product to them. Suppose I love oranges and hate apples. You love applies and hate oranges. If I have an apple and you have an orange, it would make excellent sense for us to trade. We both then walk away better off than we were before -- each by his own calculation.

We all do this every day. We find some product or service that we can produce. We produce more of it than we can use ourselves. Then we trade this surplus for things that others produce that we want. In a modern economy, we usually don't trade directly, but rather use money as an intermediate step. This doesn't change the principle, it just makes the mechanics a little more sophisticated. Instead of Farmer Bill growing apples and trading them directly for a new tractor from Tractor Salesman Dan, Bill sells his apples to a distributor, gets cash, and takes the cash to Dan. For most Americans it's even more indiect. Most of us trade some of our time for cash: We work eight hours a day in an office or factory helping to produce some product for our employer. The employer hopes to sell that product for more than what he had to pay his employees plus raw materials and machinery and all the other costs. But that's not the employee's problem. The employee simply asks, is the amount that I am being paid worth the time that I am giving up? For most of us, the answer is an obvious yes. We might like to have more free time, but we also like to have a house to live in and food to eat and the like. We conclude that giving up eight hours a day of our lives a day in exchange for the money to buy food and housing and all is a fair trade. If we didn't believe this, we would quit our jobs.

Sometimes people will say that their time is worth more than their boss pays them, perhaps even that they are being cheated. But if they really believed this, why don't they just quit? Are they being held prisoner? They usually reply that they have no choice, because they need the money. Well then, doesn't that mean that you think the money is sufficient payment for your time? Perhaps you would like to get more money. Wouldn't we all? Perhaps you would like to have more free time. Wouldn't we all? But if you are willing to work X hours per week in exchange for Y dollars, if you show up for work week after week and accept your paychecks, then you must believe that you are not only getting a fair deal, but indeed are coming out ahead on the exchange. If you didn't, you would stop doing it.

© 2007 by Jay Johansen


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