Tuesday, August 18, 2009

Trade

The basic argument for free trade, based on the idea of comparative advantage, is quite easy to understand. Let's say that farmer Alice can grow 20 pounds of wheat on the amount of land that it takes her to grow one pound of hop flowers. Let's say farmer bob can only grow 10 pounds of wheat on the amount of land that it would take him to grow one pound of hop flowers. Then if Alice trades her wheat for Bob's hops, each ends up with more beer than if both had try to remain self-sufficient. This result is extremely powerful:the conclusion trade is beneficial only requires that the relative "costs" of production (in this case use of land) are different. It doesn't matter why (it could be something about the land, or something about Alice's or Bob's skill, or anything) and it doesn't matter whether one or the other has an absolute advantage.

It stands to reason that consensual trades usually leave both parties in a sense better off. Why only "in a sense?" Because if each party benefits from the trade, then it is likely that in principle each could have gotten a better trade. This is true even with only two participants, but if there exists such a thing as a "market price", someone who makes a trade unaware of this market price and getting significantly less than the market price will, with some justification, feel "ripped off".

Attempts to fix prices will generally lead to bad results, as the market price will change over time, sometimes quite quickly, and a mandated price will either prevent mutually beneficially trades, or will be circumvented, with the costs of circumvention being pure waste. But it doesn't follow from this that all consensual trades are good ones. I think the strongest conclusion one can come to is that for a responsible adult it is disadvantageous for there to be a coercive entity with the power to restrict one's trades.

3 comments:

頭髮 said...

人有兩眼一舌,是為了觀察倍於說話的緣故。 ..................................................

健康保寶 said...

Always keep your words soft and sweet, just in case you have to eat them.............................................

friend said...

好的部落格,希望您能繼續堅持!!! ........................................