I'm Not Crazy

Most of the ideas I have expressed in this blog have been "original" in the sense that I thought of them, largely without doing a lot of research, but admittedly "unoriginal" in the sense that I knew that others must have already thought of them.  Even though these ideas are not original, I thought it important to remind ourselves of them, in a time when the fundamental principles that made America the freest and most prosperous country in the world are daily under attack.

Still, I thought, if the principles I enunciate are true they must have been announced by authoritative economists before now. As I said in my first substantive post, it must be an "iron law" of economics that "Every voluntary transaction between traders in a fair market provides to each trader more wealth after the transaction than he or she had before." But I couldn't find where that law had been stated, so I called it "Pammachius's Law." Unless I was crazy, though, it must really be someone else's law.

I'm glad to say, due to the helpful reference of a very good friend, I'm not crazy: I have found a book that makes many of the same points that I do, but citing the great economists as it goes. That book is The Rational Optimist: How Prosperity Evolves, by Matt Ridley.  Ridley makes several excellent points about how trade fundamentally shaped human evolution, that we are who we are because at some point humans  stopped trying to do everything for themselves--finding all their own food, making their own tools, building their own shelters, making their own clothes--and instead started to trade for these things, allowing them to exponentially increase their wealth, longevity, security, free time and intelligence.

In the course of making these points, however, Ridley reminds us of some fundamental economic truths.
 One of those truths, I am glad to say, is that Trade Creates Wealth, and it is known in economics as Ricardo's Law.  To be sure, David Ricardo did not state his Law in those words; rather, his focus was on the notion of comparative advantage, or the insight that trade happens when one person has an advantage in making or doing something and can produce it comparatively more cheaply than someone else can produce it for himself.  But this is the same thing as Trade Creates Wealth. As Ridley writes, hypothesizing about caveman traders:

Suppose Adam is a clumsy fool, who breaks half his hooks, but he is an even clumsier fisherman who cannot throw a line to save his life. Oz, meanwhile, is one of those irritating paragons who can whittle a bone hook with little trouble and always catches lots of fish.  Yet it still pays Oz to get his hooks made for him by clumsy Adam.  Why? Because with practise Adam has at least become better at making hooks than he is at fishing. It takes him three hours to make a hook, but four hours to catch a fish. Oz takes only an hour to catch a fish, but good as he is he still needs two hours to make a hook. So if each is self-sufficient, then Oz works for three hours (two to make the hook and one to catch the fish), while Adam works for seven hours (three to make the hook and four to catch a fish). If Oz catches two fish and swaps one for a hook from Adam, he only has to work two hours. If Adam makes two hooks and use one to buy a fish from Oz, he only works for six hours. Both are better off than when they were self-sufficient. Both have gained an hour of leisure time.

   I have done nothing here but retell, in Stone Age terms, the notion of comparative advantage as defined by the stockbroker David Ricardo in 1817.

* * *

  Ricardo's law has been called the only proposition in the whole of the social sciences that is both true and surprising.  It is such an elegant idea that it is hard to believe that Paleolithic people took so long to stumble upon it (or economists to define it).

(Emphasis added.)  Ridley goes on to show, as I have, that "Trade Creates Wealth" means voluntary transactions make the pie bigger:

A successful transaction between two people--a sale and purchase--should benefit both. If it benefits one and not the other, it is exploitation, and it does nothing to raise the standard of living. The history of human prosperity, as Robert Wright has argued, lies in the repeated discovery of non-zero-sum bargains that benefit both sides. Like Portia's mercy in The Merchant of Venice, exchange is 'twice blest: it blesseth him that gives and him that takes.' That's the Indian rope trick by which the world gets rich. Yet it takes only a few sidelong glances at your fellow human beings to realise that remarkably few people think this way. Zero-sum thinking dominates the popular discourse, whether in debates about trade or in complaints about service providers. . . .  Michael Shermer thinks that is because most of the Stone Age transactions rarely benefited both sides: 'during our evolutionary tenure, we lived in a zero-sum (win-lose) world, in which one person's gain meant another person's loss.'

That is a shame, because the zero-sum mistake was what made so many -isms of past centuries so wrong. Mercantilism said that exports made you rich and imports made you poor, a fallacy mocked by Adam Smith when he pointed out that Britain selling durable hardware to France in exchange for perishable wine was a missed opportunity to achieve the 'incredible augmentation of the pots and pans of the country.'  Marxism said that capitalists got rich because workers got poor, another fallacy. In the film Wall Street, the fictional Gordon Gekko not only says that greed is good; he also adds that it's a zero-sum game where somebody wins and somebody loses.  He is not necessarily wrong about some speculative markets in capital and assets, but he is about markets in goods and services. The notion of synergy, of both sides benefiting, just does not seem to come naturally to people.

So not only am I not crazy for positing these ideas--they are well recognized by learned economists--I am also not crazy for believing these truths are not well understood. They need to be understood, discussed and defended, by politicians, academics, mediaites, and people everywhere, because they are at the core of American liberty and prosperity. When radicals who "occupy" this or that claim that the "1%" should be divested of their wealth, through higher taxes, because they have more wealth than others, they start from the false premise that the "1%" got richer because they made others poorer--a zero-sum fallacy. To the contrary, the 1% got rich only by making others wealthier, too.  Taking away their wealth and redistributing it destroys wealth, a "negative-sum" game.

Do you doubt "the poor" get richer when they trade with "the rich"?  You shouldn't. Here's hard proof: Since 1990, a time of hugely increased world trade and globalization, the number of people living in extreme poverty in the world was cut in half, according to this Wall Street Journal article.  Who got poorer if the poorest of the poor got richer? No one, of course. The pie just got bigger. It's not a zero-sum economy. Hallelujah.