A trade improves the lot of both parties? (was: Sanctions vs. war [vs. trade])

Russell Turpin deafbox@hotmail.com
Fri, 24 Jan 2003 17:07:35 +0000


Dave Long repeats the core axiom of economics:
"A trade improves the lot of both parties."

As a generality, it is true much of the time,
but has significant exceptions. We all make bad
deals. Sometimes these stem from partial knowledge
or rapidly changing preferences. But economists
also have studied circumstances where real people
behave less than rationally. If there is a
universal truth behind the statement, it requires
quite a bit of qualification to reach it: "A
trade improves the lot of both parties, IF both
are acting rationally, IF both have adequate
information, IF the circumstances captured by that
information don't change too rapidly, IF ..etc."

As an axiom, this assumption is the basis for
many economic measurements. We measure transactions
ASSUMING that each improves the lot of all parties,
and that their dollar value gives some indication
of how much improvement is made.

Most of the qualifications on individual behavior
apply also to businesses. But on the business side,
there are objective measures and intricate processes
to determine when transactions are successful. A
business exists to maximize profits over time. The
P&L statement summarizes how well recent
transactions have forwarded that goal. Businesses
that too often fail in this goal, that make too many
harmful trades, are eventually dissolved.

People rarely treat their own economic activity so
carefully. They may repeatedly make trades that are
bad, through habit, addiction, ignorance, youthful
indiscretion, inability to bargain, distaste for
aggression, psychological obstinance, delusional
ideas about the future, etc. Fortunately, we do not
dissolve individuals whose aggregate transactions
are bad. Instead, we let them carry on in debt.

There are two or more parties to every trade. While
they are, ideally, engaged in a positive-sum game,
that isn't always the case, and at each trade, they
are somewhat competitive. The better deal one makes,
the worse deal the other makes. Negative-sum trades
may benefit one of the parties. Given the greater
discipline on the business side, it is hardly
surprising that there is a large endeavor from it
to maximize consumer activity, including trades that
are not beneficial to the consumer. Deals are
packaged, offered along different channels, heavily
advertised, amortized, and fine-printed to maximize
consumer participation. Most economic measures
ASSUME that participation equals benefit. We know
this is not always the case, yet few economists
try to investigage how much difference there is, or
when marketing works to increase participation at
the expense of benefit.


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