* * *
Trade Creates Wealth
When was the last time you grew a vegetable and ate it? Or fixed your own air conditioner? Congratulations if you did, because, guess what, you created wealth. Through your work, you created something that wasn't there before--a vegetable, a working air conditioner--and made yourself better off.
But I suspect that not many of you grow your own vegetables or fix your own air conditioner. Instead, when you need a vegetable or a fixed air conditioner, you do what most everyone else does and you pay for them. You exchange some of your wealth for these things you need, and those who have what you need gladly take that wealth and provide those things. This is what we call trade.
If you become more wealthy by working yourself to grow a vegetable or to fix an air conditioner, aren't you less wealthy if you have to pay someone else to provide those things to you?
The answer is, emphatically, no. In fact, I would say in the vast majority of cases, you are much more wealthy after paying someone else for these things than you are if you do them yourselves. One reason, of course, is the opportunity cost of your time. The time you spend to create one vegetable is worth a lot more to you than what you could pay to buy it, so buying it makes you that much better off. But another, and I think more important, reason is this: Every voluntary transaction between traders in a fair market provides to each trader more wealth after the transaction than he or she had before. I would say this a fundamental truth of economics, an iron law that every Econ 101 student should know by heart, although I have looked to see where this law has been enunciated by great economists and have yet to find it stated. No doubt Smith, Marshall, Pareto or Schumpeter recognized it somewhere, but until I find out where I will call this Pammachius's Law: Trade Creates Wealth. [As I state in a later post, in fact the principle was enunciated by David Ricardo and is known as Ricardo's Law.]
The rule that Trade Creates Wealth applies even to transactions where one can make or do the thing desired at relatively low opportunity cost. This is true because, otherwise, one wouldn't enter into the transaction. I can mow my lawn in about 15 minutes. I have the mower; I have the gas; I have the time; I even have the inclination (there is a certain satisfaction in exerting oneself and getting a nicely mown lawn as a result). But I can pay my neighbor's son $15 to do it for me, and I do. Why? The only reason must be that I am better off paying someone else $15 to do something than I am doing it myself, even though doing it would be easy, because otherwise I would refuse the transaction. I therefore am more wealthy paying to have my lawn mown than I am mowing it. I trade $15 for my neighbor's son's time and energy, but I get more than $15 back in increased wealth (a mown lawn, with no effort on my part) after the transaction. What's more, my neighbor's son gets $15, but that's worth more to him than the time and energy that he provides to do the job, otherwise he wouldn't do it. I'm better off; he's better off; we both are wealthier after the transaction than before. Trade creates wealth for both traders.
Let's return to the concept of opportunity cost to show just how powerful trade is in creating wealth. The example we just explored showed that wealth can be created even when opportunity cost is low: I have the equipment, materials, time and inclination to do the lawn mowing job, so doing the job doesn't require that I forego many other opportunities, and it therefore has a low opportunity cost. I am still wealthier by paying someone else to do it (as long as the price is right). But if I want a green pepper, the opportunity cost of creating it is quite high. I need a patch of land suitable for planting a garden; I don't have one. I need to till, fertilize, plant, water, tend, and weed, all at the right time, all presupposing I know how to do this, then at the end of this long process, I get my green pepper. In terms of opportunity cost, that pepper probably costs several thousand dollars, as that is how much I could have made earning wages with the time I spent, instead, growing a vegetable. Instead, I get the green pepper by paying $1.29, trading with my grocer. That trade, of course, makes me thousands of dollars better off than I would be if I grew the pepper myself. Thus, the greater the opportunity cost to you of making or doing something you need, the greater the wealth you are likely to realize when instead you trade to obtain it.
So, voluntary transactions in a fair market make both traders more wealthy. Trade does not make one trader poorer and the other richer; it makes both parties richer. Both traders can take their expanded wealth and trade with others, who themselves grow more wealthy; and they trade with yet others; and on and on; making trade the great exponential expander of wealth. Wealth doesn't "trickle down" to others; it rushes in a torrent, building and building, as long as trade is voluntary and in a fair market.
If voluntary transactions create wealth, what do involuntary transactions do? That will be my next post.
No comments:
Post a Comment