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

Dave Long dl@silcom.com
Fri, 24 Jan 2003 13:26:37 -0800


> "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.

Good job!  I hope we can come up with as good an
analysis for why totalitarian/free trades could
be unbalanced as you have for why b/c trades can
be unbalanced.

(I have heard of a Persian statement running on
the lines of "who are these Greeks, who have a
special place [the Agora] where they go to cheat
one another?")

> A business exists to maximize profits over time. ...  Businesses that
> too often fail in this goal, that make too many harmful trades,
> are eventually dissolved.

Businesses can hire good managers, so why would
they make too many harmful trades?  I think it
less likely that they make decisions which are
bad in foresight, but more that they place bets,
which turn out bad in hindsight. [0]

Take a capital investment: the question is not
so much one of "is <x>k the best price we can
get on this machine", but "will it more than
repay for itself?".  The market can answer the
first question; the second is discovered a day
at a time. [1]

On the books, someone takes a project with a
10% chance of making $10m, and calls it a good
trade for $800k worth of expenses.  But it only
seems even, before the die is cast.

If we can't control how the dice will turn up,
we can at least influence how many times they
are rolled.  In general, I think the people who
expect to have good odds ought to behave like
supermarkets (who make up for low margins with
incredible turnover), and the people who expect
to have poor odds ought to behave like the (if
one exists) rational roulette player (who'll
minimize the house advantage by putting down
an entire lifetime's stake on one roll). [2][3]

-Dave

:: :: ::

[0] as an owner, one wants managers who are less
risk averse (so one gets maximum return out of a
diverse portfolio), but not managers who have no
risk aversion (since one doesn't want to have a
high chance that the entire portfolio tanks).

[1] the ancient world had to make these kinds of
decisions also: a row cropper has low fixed costs,
but has to put in plenty of labor each year; the
orchard owner puts in a lot up front, but (if the
demand holds up and his trees [4] aren't destroyed
by pestilence or war) can generate a high income
off little labor for years; the rancher can have
low inputs, but can be wiped out by short drought.

[2] So: why do we behave like Iraq is the house
and we are the punters?  Their belligerence is
explained by this model, but ours is not.

[3] Or perhaps like the thinking man.  When AN
Whitehead says:
> Operations of thought are like cavalry charges in a battle -- they
> are strictly limited in number, they require fresh horses, and must
> only be made at decisive moments.
he means that thought is much riskier than pushing
symbols around -- so it is to be used only in the
cases where calculation doesn't dominate.

[4] I used to wonder why a campus would attract
olive trees, especially during the slimy season.
Then I realized that the Academy's endowment was
the olive grove in which it was located.