Suppose that I am one of three boys at a summer camp. Each of us receives an identical care package, consisting of two bags of pretzels and two boxes of apple juice. I like pretzels and apple juice, but boy A only likes apple juice and boy B likes only pretzels. I trade one bag of pretzels to A for two boxes of apple juice. I trade one box of apple juice to B for two bags of pretzels. [OOPS. This was backwards. I trade the apple juice to A and the pretzels go B] Everyone is happier after the trading, but I wind up with three bags of pretzels and three boxes of apple juice.

How did I end up with so much, without producing any apple juice or pretzels myself? What I did was process information. I used the information about the preferences of the other boys to make them better off while earning a profit for myself. Some further remarks:

1. Because the middle man is an information processor and not a producer, his role is often resented. People talk about eliminating the middle man. But you cannot eliminate the middle man without coming up with an alternative way to process the information.

2. There is a classic article by R.A. Radford, called The Economic Organization of a P.O.W. Camp. See also Michael Munger’s essay.

3. There is often competition, involving multiple middle men. They may use similar methods, or they may use very different methods.

4. Because they are information processors and because there is competition, middle men need to be mentally sharp.

5. Finance is to a large extent a middle-man industry.

Trade is almost always good.

I want to propose that as the central principle of economics. More on that in other posts. In this post, I want to talk about how trade might be bad or might be perceived to be bad.

1. If you hold a gun to my head and demand something, that is bad. In fact, I would say that does not even count as trade.

2. If I buy on the basis of fraud or deception, then the trade is bad. Florida swampland. Snake oil.

3. What if I was not deceived, but afterward I regret the trade? In 1964, the Chicago Cubs traded Lou Brock to the St. Louis Cardinals for Ernie Broglio. The Cubs came to regret that trade. I have made some investments that I regret. But in my view there is nothing unfair or morally wrong about trades that someone later regrets making.

4. What if you are in the desert in danger of dying of thirst, and I offer to sell you a bottle of water for $1000. Is that a bad trade? I would argue that what is bad is the circumstance in which you find yourself, but the trade itself is legitimate. I would argue that even more strongly in the case of buying clothing made in a sweatshop. Assuming that the worker chose to work in a sweatshop over other alternatives that were worse, it is not a bad trade. For more on this issue, I recommend this podcast with Russ Roberts and Michael Munger.

5. Is it bad to trade with people whose cultural or political views you dislike? A lot of people feel that way, but the opposite might well be true. Suppose that you choose to trade solely on the basis of profit. Clearly, that makes you better off. Also, by not discriminating against others on the basis of ethnicity or culture or politics, you are probably helping to make the world a better place.

6. In fact, trade is probably best when it is impersonal. The closer you are to a person, the more doubtful trade becomes. I would not recommend to parents that they pay children to help around the house. Instead, I would recommend telling children that you consider it their responsibility to help around the house (and being specific about what that means).

7. Trade involving a person’s body makes people squeamish. We do not want people selling themselves into slavery. Many people, although not all, oppose prostitution. Many people, although not all, oppose the sale of drugs like heroin or cocaine. Many people, although not all, oppose allowing people to pay for organs to be used in transplants. Among economists, there is more support for legalized prostitution, drugs, and a market for organs than there is in the general population.

8. It could be that one of the reasons that we rely heavily on third-party payments in health care is that we are squeamish about trade that pertains to the body. We prefer to think of the doctor as offering the gift of healing rather than as someone making a trade.

The first and second world wars were characterized by entire societies being mobilized for war. In order to out-fight one another, countries had to out-produce one another. During both wars, England attempted to blockade Germany using surface ships, and Germany attempted a counter-blockade using submarines. During World War II, the location of oil, rubber, and tin helped determine strategy. In the decades following World War II, the Defense Department budgets remained high in order to deal with the Korean War and the Cold War, leading President Eisenhower to issue his famous warning about a military-industrial complex.

Wartime economies involved central planning, as governments sought to control production and allocation to serve military needs. I argue that trade is the central economic activity. But in a wartime economy trade takes a back seat to planning, production and allocation.

I believe that the wartime economy had influence long after wars ended.

1. In the 1930s, intellectuals looked back fondly to the economic mobilization of the first World War. Many of the first New Deal planning bureaus, most notably the NRA, were modeled on wartime agencies. Roosevelt’s team used the metaphor or war, and the phrase “moral equivalent of war” came into use. (Decades later, President Carter famously declared that higher oil prices required a response that was the moral equivalent of war.) In contrast to the free market’s aimless satisfaction of base consumer desires, the wartime economy was considered more rational and purposeful.

2. The story told in MIT and the Transformation of American Economics shows the influence of the wartime economy. The MIT economics department was funded lavishly by the Defense Department, as MIT’s research agenda was useful in planning, production, and allocation.

One of the mathematical tools that became popular in postwar economics, linear programming, is designed to help the central planner solve a resource allocation problem. The classic textbook on linear programming, written in the late 1950s by Dorfman, Samuelson, and Solow, was only just beginning to fade from use in the late 1970s when I was in graduate school.

I believe that the research methods and textbooks that came out of this MIT-centered transformation were too heavily influenced by the wartime economy. Economists worked very hard to develop tools for “seeing like a state.” They lost track of the way that an economy does not have to resemble a wartime economy.

1. The patterns of specialization and trade can emerge, without being centrally planned.

2. The economy does not maximize an objective function. If anything, it maximizes subjective functions. Value depends on what is in the consumer’s head, and this information is not accessible to the central planner.

3. Costs cannot be measured objectively by adding up the prices of inputs. All costs are opportunity costs, and opportunity costs are subjective.

4. Trade is a technology If you think in terms of a production function, new patterns of trade shift the production function.

A while back, I threatened to put together an introduction to economics that runs counter to the “seeing like a state” tradition in textbooks that Paul Samuelson started. I call this “teaching emergent economics,” and as my thoughts develop I will post them in this category. Here are thoughts on trade as a technology.

1. David Friedman in his textbook, The Economics of Everyday Life, pointed out that we can grow automobiles in Iowa by growing grain, putting it on ships to Japan, and having the ships come back with automobiles.

2. In theory, we do not need to produce anything in order to have an interesting economy. Suppose that several of us receive regular endowments of different goods. Trading among ourselves can produce gains.

3. In an actual economy, we engage in production. However, we engage in production primarily for exchange. Centuries ago, a farmer produced for subsistence. But in the past two hundred years, in advanced countries farmers have produced for exchange.

4. In fact, production for exchange is so important that GDP only measures production for exchange. It counts goods and services that trade at market prices, not the value of home cooking.

5. The fixed-proportions concept of production is very misleading. It is particularly misleading as a way of describing an entire economy. When people think in terms of fixed proportions of resources needed to produce goods, they imagine running out of resources. Instead, as some resources become scarce and their prices rise, substitution emerges. People make different consumption choices. Producers come up with different recipes for producing goods and services.

6. Even without fixed proportions, a production function can be a misleading concept. If you have two economies with identical production capabilities, one economy can be much better off than the other. If the first economy takes optimal advantage of trading opportunities and the second economy does not, then the first economy will be better off. It will appear that the first country has greater “total factor productivity,” although its advantage has nothing to do with production per se.

7. If an entrepreneur invents a new product or a new production process, that necessarily creates a new trading opportunity. If an entrepreneur invents a new trading opportunity (think of eBay), that is equivalent to inventing a new production process.

8. Thus, we can think of entrepreneurs in terms of how they affect trading opportunities. They alter trading patterns in response to price changes that in turn signal surpluses and scarcities. And they test new trading opportunities, sometimes in the form of new products or production processes.