Everybody Plays, Everybody Wins

At Cafe Hayek, Don Boudreaux has an excellent post on comparing “wins” and “losses” from free trade and minimum wage.  In the comments section, commenter Jermel Purse asks:

“All true but who gets the net wealth and who losses the net wealth.[sic]”

Don responds to his direct question, but there is a larger point I want to make on the difference between net gains and net losses from free trade and minimum wage.

From an economic point of view, one can argue that no one really loses from free trade.  After all, free trade is, by definition, voluntary and mutually beneficial.  In other words, both parties benefit from the exchange. There are no losers directly involved in the exchange.*

However, the same cannot be said with minimum wage.  With minimum wage, an exchange is imposed upon the parties: “you WILL work for at least wage X or you will not work at all!” This means that anyone who is willing to work for less than X but cannot find anyone who can pay him less than X will not be able to work.  Absent minimum wage, he would be able to work.  In other words, a mutually beneficial action that would have normally occurred does not and at least two people who would have benefitted cannot. Therefore we have at least two losers.

These realities get lost in the churn when we begin talking about things on a macroeconomic level and focusing only on this can lead to false conclusions. Ultimately, all economics is microeconomics.

*Some may argue that the losers are those not involved in the exchange, but such an argument doesn’t have any ground to stand on.  It has the implicit assumption that those producers not involved in the exchange have some right to the buyer’s wealth and that those buyers not involved in the exchange have some right to the producer’s wealth.

12 thoughts on “Everybody Plays, Everybody Wins

  1. >—“Ultimately, all economics is microeconomics.”

    This is true in the same sense that all biology is chemistry and physics.

    In both cases the emergent phenomena arise from something much simpler. When you look closely, you never see anything that isn’t really the constituent parts but studying the constituent parts by themselves will only teach you part of what you could learn from also studying the emergent phenomena.

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      • aajaxx,

        There are lots of emergent phenomena that macroeconomics won’t teach you anything at all about simply because they aren’t macroeconomic phenomena. Peaceful coexistence and personal fulfillment would fall into this category.

        Some types of economic phenomena can be usefully studied at he macro level. Consider the Credit Default Swap which is a form of economic innovation. CDS is something you only see in complex economies. You will see effects from it at the macro level that could not have been predicted from the micro level behaviors.

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        • “You will see effects from [Credit Default Swaps] at the macro level that could not have been predicted from the micro level behaviors.”

          No. The micro level predicted what would happen when people use products in ways that were not intended. It is kind of like government policies. They sound good at the macro level, but the micro level predicts their disastrous results.

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          • Libertarians were virtually unanimous in predicting that the legalization of CDS would REDUCE systemic risk because it would allow the market to transfer risk to those best able to handle it.

            As it turned out CDS was a great way to transfer risk from those best able to understand it to those least able to understand it. Perhaps you have heard of AIG? As it turns out, those best able to understand risk will use that understanding to get rid of it as much as possible.

            With the notable exceptions of Brooksley Born and Warren Buffett, almost no one predicted the effects that CDS and similar derivatives would have on systemic risk. The fact that you can go back after the fact and tell some microeconomic story does not mean that the micro level predicted the events.

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          • “Libertarians were virtually unanimous in predicting that the legalization of CDS . . .”

            You love to make stuff up. CDS were never illegal. Duh.

            “Perhaps you have heard of AIG?”

            Yep. AIG did not know how to manage risk, and the government bailed them out in order to indirectly bail out other investment banks like Goldman Sachs. It was idiot “progressives” that wanted to bail out AIG and Goldman Sachs. Libertarians wanted to let them fail and let smarter competitors buy those assets at discount prices. Duh.

            “. . . Warren Buffett . . .”

            A political crony who got a near risk free deal from the government to make even more money. Yep, he was the political crony benefiting from corrupt politicians and “useful idiots” like yourself.

            “. . . that the micro level predicted the events.”

            Micro predicts disaster anytime loans are made where the creditor takes on too much risk, which is what micro predicted when government encouraged banks to not consider normal lending standards when lending money to people who could afford to repay home loans.

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    • Lol! Chemists look at the underlying causes (i.e., micro) to various phenomena. They do not make stuff up that has little bearing to the micro like they do in economics.

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  2. In a voluntary transaction, both parties may benefit, but the more wealthy person or corporation, having access to various advantages such as scale, information, time-independence, etc., probably benefits more. In a single transaction, this does not matter so much, but in the aggregate and over time, would seem to lead to inequality. Why is inequality a big problem, especially if the minarchist ideal is also in place? I’m not sure. Perhaps it leads to higher pricing in housing and other necessaries, tending to price them out of reach of people at the low end. I have not seen this discussed in my admittedly casual readings in economics.

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