Saturday, March 9, 2013

Trade Works Because We're Different

“If all men were equal in interest and endowment, natural or artificial, there would be no organized economic activity to explain. Each man would be a Crusoe. Economic theory thus explains why men cooperate through trade: they do so because they are different."' James Buchannan.

The truth of the above statement was really hammered home for me during my first year PhD macroeconomics course where I was given a problem about trade.  For the purposes of the question, we assumed that only one type of person exists.  That is when I saw mathematically that it is better if people are different.

Variety is the spice of life, but it's also the driving force behind economics.  Odds are, I can understand a firm's pricing strategy or the mechanics behind how the authors of Freakonomics arrive at their conclusions better than you can.  Maybe you can cook or sew better than me or you have interior design talents I lack (the last option is highly probable).  The amazing thing about trade is that we can each do what we are good at and provide those goods and services to other people who are also doing what they are good at.  This is the supply side benefit to trade.

There is also a consumption side benefit to being different.  You may have a stopwatch that you no longer use and it's not worth very much to you.  You would really like a Zippo lighter.  The stop watch would be highly valued by a track coach whose own stop watch just broke.  If he offers to give you his old Zippo (because he quit smoking and it's no longer so valuable to him) in exchange for your stop watch, then both of you can benefit.  Even ignoring production, there can be gains from trade.

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