Saturday, August 01, 2015

What Free Trade Is, and Isn't. Why apples are sometimes better than tacos, why I miss Bad Quaker, and why software CEOs earn more than the average union member

Bad Quaker, who unfortunately has had, due to health reasons, to end his own informative libertarian podcast,  used to give the absolute best analogy of what Capitalism is.

Say two people are the only population of a desert island.  Somehow the island supports enough of a food supply that one of them is able to make really good tacos, and the other is able to grow some apple trees.  So for a while, one lives on tacos and the other, on apples.

Then one day, the taco guy gets really sick of tacos.  He starts to think, I've seen that other guy harvest apples.  Maybe I could get some apples from him.  So he walks over and asks.  He shows the other guy some of his tacos.  The apple guy is amazed.  He likes his apples, but those tacos taste great and for the variety, he's willling to give up some of his apples.  In turn, the taco guy is happy to hand over a lot of his tacos.

Who profited by this Capitalist exchange?  The apple guy, or the taco guy?

The answer is both.  Apple guy felt the tacos were worth giving up some of his apples.  Taco guy felt the apples were worth making some of the tacos to give away.  Both profited,  because both apple guy and taco guy were just going to be doing what they'd be doing anyway, and what they didn't find abhorrent.  To add grist to the mill, let's say apple guy HATED cooking, and taco guy had no green thumb,  so tending an orchard would have been difficult for him.  This way, neither has to do work that they don't do well or that is excessively difficult, but at the end of the day, each feels he has more than he had before the exchange.

And that is exactly what free trade is.

Socialists talk about free trade as though, if someone benefits from a trade, someone is always the loser.  But if that were the case, voluntary free trade wouln't happpen.

Money doesn't follow some physical law such as the conservation of energy.  If someone makes money at something, it doesn't automatically mean that another person suddenly has less.  Why would it?

In fact, wealth itself is an intangible concept, symbolized by currency and goods that the wealth holder values.

We've heard that in India, at least in pre-Colonial India, wealth was measured by how many cows you owned.  It wouldn't have occurred to an East Indian to "sell" his cows to you for some coins and notes.  Why would he want to do that?  Not only would he no longer be seen as the richest guy in his district, but how would he afford the dowry for his daughter to marry another rich man?  On the other hand, unless we owned a ranch or a large dairy farm, neither you nor I would want someone to give us a bunch of cows.  What would we  do with them?

And yet the cows of the pre-Colonian Indian, and our currency, both stand for wealth within our respective circles.

So the Union protestor yells at the rally, "I want my piece of the pie!"  which is weird, because Union members tend to make a lot of money.  But say he's earning less than the CEO of a software firm.  If you ask him what is wrong with that, he will tell you it's not fair for a CEO to earn millions of dollars, and for him to only earn 100 k a year.  He thinks that if the CEO earned less, there would be more that would make it's way to him.

However, how much the CEO of the software firm earns has nothing to do with what the Union protester earns.

What has it to do with?  Well, assuming a free market (which wouldn't have allowed the Union protester to get the over-priced salary and lifelong pension he or she has, but I'll overlook that for now), with no subsidies from the federal government to the software firm, the CEO CAN only be paid what his or her market worth is.  No company that wants to survive will overpay their CEO.

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