Why Trade is Beneficial - The Ebay Way
Ebay can provide a very good illustration of why trade is good for everyone.
Let’s say I have a Coldplay t-shirt that I was given as a present, have worn once or twice, but am ashamed of and want to get rid of. As such, it isn’t worth much to me - if forced to assign a value, I might say £1. I’ve just been given a phone, though, an older model, and want a spare charger for it.
You have just upgraded your mobile phone, and are left with the old charger. It’s therefore useless to you - you might say that’s worth £1 to you too. You like bland British pop, though, so you’re looking for a Coldplay t-shirt.
I put up the t-shirt on Ebay, and you put up the phone charger. We both bid £5 for each other’s items, and exchange goods and money. Since we both bid the same amount, the amount of money in our hands has not changed. However, we’ve both gained wealth, because we both now have items worth at least £5 to us rather than £1. Thus, the total amount of wealth in the economy has gone up, and we’ve both made a profit. In other words, the transaction is win-win (as are most transactions).
Of course, there are some simplifying assumptions here:
- The market is more complex: the chance of us both being buyers and sellers on Ebay and exchanging items like this is obviously low. In fact, in the example above, we could have bartered and simply exchanged items - money is typically used just because it makes the market more liquid - it doesn’t require both of the transactions above to happen simultaneously between the same parties. If only one of the transactions above happened, the same argument would still apply: it’s simply that the seller values the item less than the money paid, and the buyer more.
- I haven’t discussed the transaction costs involved.
Hopefully this example illustrates why trade is a good thing for increasing everyone’s wealth. The corollary is that international trade is also beneficial - because there is wider scope for finding people who wish to trade and increase the net wealth. This is one reason why I support the Adam Smith Institute’s campaign to increase free trade and oppose any artificial distortion of trade boundaries or protectionism. (Incidentally, their blog is well worth reading).
Agreed.
I find Russ Roberts and Don Boudreaux at Cafe Hayek to be masters at making these sorts of arguments.
Here’s an echo of what you wrote: http://cafehayek.typepad.com/hayek/2006/08/revised_platfor.html
Richard G Brown
15 Aug 06 at 13:08:32
>the total amount of wealth in the economy has gone up
Hurrah!
dps
15 Aug 06 at 15:08:24
Richard, yes, I read Cafe Hayek, and they are part of the inspiration for this article, along with the ASI. I’m sure they probably say it better than I do, generally. I just think it bears repeating
andrewferrier
15 Aug 06 at 19:08:27
“I just think it bears repeating”
Quite
Richard G Brown
15 Aug 06 at 19:08:41
It’s interesting how openness of information comes into the equation in all this. Taking your phone charger example a bit further; things are not as rosy if the person buying it knows something the seller doesn’t. In a somewhat convoluted scenario, perhaps the charger contains a discontinued component which is now very difficult to get hold of, and maybe the buyer works for a company that’s just received an order for something that needs this component. The buyer knows that he can get much more money for the component than the cost of the charger, say £50. (Still it’s usually buyer beware, so perhaps this is just kama!) I get the impression that insurance suffers from these problems more than other markets.
As for the recommendation for The Undercover Economist (http://www.new-destiny.co.uk/andrew/blog/2006/08/13/tesco-show-what-innovation-is/#comment-565), I’d second that: it’s an excellent read.
James Taylor
16 Aug 06 at 11:08:19
“It’s interesting how openness of information comes into the equation in all this. Taking your phone charger example a bit further; things are not as rosy if the person buying it knows something the seller doesn’t. In a somewhat convoluted scenario, perhaps the charger contains a discontinued component which is now very difficult to get hold of, and maybe the buyer works for a company that’s just received an order for something that needs this component. The buyer knows that he can get much more money for the component than the cost of the charger, say £50. (Still it’s usually buyer beware, so perhaps this is just kama!) I get the impression that insurance suffers from these problems more than other markets.”
The problem of a seller not knowing the value of what they’re selling is a pervasive one, I imagine (e.g. stories of collectors buying picasso paintings from charity shops for 50p, etc….). I’m not sure it’s an argument against trade but it’s certainly an argument for taking advice, research (presumably there are other chargers for sale? would their prices not be bid up rather rapidly if there’s a lot of demand for the magic component?)
As for insurance… is this the adverse selection problem? i.e. the only people thinking of taking out cover for problem X are the ones most worried they may have it or soon get it! I guess the presence of rules like “you cannot claim for illness A, B or C within 30 days of taking out the policy” are a guard against that.
I guess insurance is a special case: one of the few places where the purchaser has a duty of disclosure… i.e. you can keep a material fact quiet if you like, but you’d better pray they don’t figure it out
Richard G Brown
16 Aug 06 at 15:08:17
Sure, I wasn’t suggesting the problem of a seller not knowing the value of what they’re selling is an argument against trade in general but I think it is an argument for openness, and it could explain why some people are so anti-trade. As things stand though, taking advice and spending time doing the right research is critical for both buying and selling, hence my last few nights investigating very dull building regs and getting lots of quotes for work on my house.
Insurance is something I do have a bit more of a problem with though. Your example of, “you cannot claim for illness A, B or C within 30 days of taking out the policy” is a good one. What exactly are you paying for in the first 30 days? Other peoples’ dishonesty I guess.
In idealistic jt world, I think insurance should be about spreading the risk for the benefit of everybody, but as insurance companies break down people into smaller and smaller risk groups, the closer it seems to get to being pointless. Sure, some people get cheaper insurance, but they are never likely to actually need that insurance, so it’s still a waste of money. At the other end of the scale, people needing insurance are less likely to be able to afford it in the first place. So what do the insurance companies exist for?
That’s not to say that a completely flat cost is right either. If you can take reasonable steps to decrease your risk, you should be rewarded with lower premiums. For example, fitting better locks or an alarm, taking an advanced driving course, or doing exercise. There are other things that I personally don’t think should influence premiums: I (currently) can’t change my genes, so I might have a higher risk of certain diseases, and I’m obviously more likely to have a car accident being male.
Ok, that was a longer reply than I was expecting, sorry!!
James Taylor
17 Aug 06 at 11:08:28
Here’s an interesting article discussing Wal-Mart’s possible alleviation of poverty in China:
http://www.tcsdaily.com/article.aspx?id=082206D
andrewferrier
25 Aug 06 at 14:08:18
[...] It seems to be a commonly held contemporary belief that transport and travel are a guilty pleasure at best, and reprehensible at worst, mainly due to the unpleasant environmental side-effects, and should be minimised. Environmentalists have already invented carbon offsetting to assuage collective and individual guilt about the trendy problem of carbon emissions (Tim Harford has explained why this makes no sense; and I think it’s nothing short of miraculous how carbon offsetting services can put a price on emissions so easily). However, the upside is often overlooked. Travel is pleasurable. Some of the best experiences in my life have involved travelling, and I’m far from the only one. Quality of life does have value. Perhaps even more importantly, transport enables you to get stuff more cheaply. Trade is mostly beneficial, and the wider the scope of a market, the more beneficial it is (because of the greater likelihood that you’ll find large extremes of want and produce a large profit). Fast, cheap, reliable transport increases the efficiency of markets and is good for humankind. Don’t feel bad next time you hop on a jet, and please don’t waste your money on offsetting carbon. Recycling is a whole ‘nother story. [...]
Andrew Ferrier’s Blog » Blog Archive » Transport is Good
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