Monday, November 12, 2012

Voluntary Exchange at the Point of Mutual Self-Interest

“If an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it. Most economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can only gain at the expense of another.” - Milton Friedman

The “simple insight” that Friedman mentions above can be difficult to comprehend when, as Friedman points out, zero sum thinking is introduced, that is, “that one party can only gain at the expense of another“.

Is zero sum thinking purposely introduced [that exchange is a phenomena where one party only gains at another party’s expense] as less of a “tendency” and more of a politically motivated event? Stated alternatively, is zero sum thinking applied to exchange to allow for a third party, the politico, to supposedly rectify the gain? To levelize the gain as it were. To become the white knight charging in, to solve the ills of exchange, when in fact no ills exist.

When one states that voluntary exchange at the point of mutual self- interest makes the pie grow, the phenomena may well be assumed to be self evident. If the phenomena is not as self evident as many assume, then an expanse of foggy gray area of not-so-self evident exists which allows the opportunity the politico seeks to introduce third party intervention at the point of exchange. It may well be that the simple insight which is supposedly of a self evident nature [voluntary exchange at the point of mutual self interest makes the pie grow] needs better articulated so as to close the window for politico interests.

One of the better articulations of the concept of voluntary exchange at the point of mutual self-interest which makes the pie grow appears below:

“The basic mechanism of contract is very simple, powerful, and universal. It essentially involves your surrendering something that you value in exchange for something else that you value even more. If both sides allow the trade to occur, there will be an enormous increase in overall well being….”

“What is even better is that this one simple idea of gains through trade is capable of infinite repetition.”

“One good idea bets a thousand bad ones”.

“The logic of mutual gain from voluntary exchange is perfectly general. It rests only on the self-interest of individuals in a world of scarcity. It is not particular to one culture, one time, or one set of values”.

“….exchange is not role specific…”

“It does not create one set of rules for people who are rich and powerful and another set for those who are frail or meek. Instead, the law speaks about two hardy standbys in all contractual arrangements: A and B. These people are colorless, odorless, and timeless, of no known nationality, age, race, or sex.” (1)

(1) Simple Rules for a Complex World, Richard Epstein, 1995, Harvard University Press, pgs. 72 and 73.

1 comment:

  1. Zero sum and dual benefit describe two entirely different (almost opposite) universes. It should be very straightforward to determine which is true. If this is the case what then accounts for the preponderance of zero sum thinking?