• Economists generally favor free trade, but trading has long had an unsavory reputation in the Western world because of the wrongful bias that nothing can be really gained through mere exchange.

  • Merchants seem to reap without sowing, their activity does not appear to create anything and yet they are rewarded for their efforts.

  • However, most people choose to use the middleman's services.

• Exchange is productive because it makes available more of what people want.

  • The exchange of private property rights is fundamental to market processes

  • It increases the wealth of the trading parties.

Goods and bads

• The act of cooperative exchange is fundamentally an agreement to swap property rights—ownership—of goods and services.

• A good is anything whereby more of it is preferred to less.

  • Free good: a good that can be acquired without sacrifice

  • Scarce good: can only be acquired by sacrificing some other good, something else of value

• a bad is something in which less is preferred to more

• the notion of an economic good or bad is subjective

  • What’s considered a bad to one person might very well be a good to somebody else

Wealth

• Wealth, in the economic way of thinking, is whatever people value.

  • value is in the eyes of the chooser

• Economic growth consists not in increasing the production of things, but in increasing the production of wealth.

  • Material things can contribute to wealth, obviously, and are in some sense essential to the production of wealth

  • But there is no necessary relation between the growth of wealth and an increase in the volume or weight or quantity of material objects

• Commercial society

• Voluntary exchange is never an exchange of equally valued things. If it were, it would not occur.

  • Traders cooperate with one another to enjoy the opportunity to gain more of what each values.

  • The opportunity for each to gain provides the incentive. Both parties expect to gain by giving up something of lesser value for something of greater value.

• Manufacturers try to rearrange materials into more valuable combinations.

  • Exchange is an alternative way of producing something.

• Opportunity cost: the cost of obtaining anything is the value placed on whatever must be sacrificed in order to obtain it

Efficiency and values

• The economist’s notion of efficiency compares, from the chooser’s own perspective, the additional benefits against the additional costs.

  • a question that asks “Is it worth it?” at the individual level is a question about economic efficiency

  • What we value determines what we will consider efficient or inefficient

• The question is not “What is really more efficient?” but rather “Who has the right to make particular decisions?”

  • When the rules of the game establish clear and secure property rights, they implicitly decide by what process prospective benefits and costs are to be evaluated for decision-making purposes

• When property rights are clear, stable, and exchangeable, scarce resources tend to acquire money prices that reflect their relative scarcity

Recognizing trade-offs

• The production possibilities frontier (PPF) illustrates the maximum combination of stout and lager that Jones can produce using a given set of resources and talent

• the ability to make more, in itself, is not a measure of efficiency. We must compare what is sacrificed against what is gained.

  • Figure 1 example: For each gallon of lager, Jones sacrifices the opportunity to make 1/2 gallon of stout.

• Comparative advantage: Who produces lager at a relatively lower opportunity cost?

• In the real world, people pursue their comparative advantages simply by choosing the option that they find most attractive, all things considered.

  • In most of these decisions, relative prices provide fundamental information.

Specialization and exchange

• What would happen if each were to specialize in the activity each is relatively more efficient at doing and trade between each other?

  • By following their own comparative advantage, they are using scarce resources more productively

• Specialization is another word for “following one’s comparative advantage.”

  • It explains why people forsake being “a jack of all trades” for highly specialized activities

Individual and international trade

• Each party ultimately pays for its imports with its exports

• Entities don't trade, only individuals do

  • USA doesn't trade with Finland, its inhabitants do

  • this is a shorthanded expression for a fantastic number of exchanges among a huge number of people, many acting in the name of larger organizations

Transaction costs

• Voluntary trade is mutually beneficial; otherwise, it wouldn’t be undertaken

• Transaction costs are the costs of arranging contracts and agreements—trades in general—among interested parties

  • Physical distance might add a hurdle to trade; so, too, does ignorance of existing trading opportunities.

Middlemen

• Middlemen expand the range of opportunities available to us.

• A large part of the middleman’s bad press stems from our habit of comparing actual situations with nonexistent better ones.

• Middlemen create information through prices.

Economic growth

• except for a tiny handful of privileged people, poverty has been the rule rather than the exception throughout almost all of human history.

  • One of the big questions in economics, therefore, is not what keeps people poor, so much as what has enabled some to become rich.

• In other words, wealth came from the huge increases in production caused by the division of labor.

  • Economic growth was a consequence of the evolution of commercial society, a society in which everyone specializes and then lives by exchanging

• Karl Marx attributed the enormous increases in production that had occurred in some countries in the eighteenth and nineteenth centuries to development of the system of commodity production

  • Marx thought he saw deep flaws in a society characterized by private ownership and production for profit, flaws that would ultimately destroy the system. But he had no doubts about its ability to produce wealth

• What Smith called commercial society Marx referred to as bourgeois society.

Evolution of rules

• “nations” don’t actually “adopt” systems as complex as a commercial society. And neither do individuals.

  • Complex social institutions evolve without a blueprint in advance.

• Rule of law