Wednesday, February 4, 2015

Free Lunch = Trade

Despite much talk to the contrary, there really is a free lunch.  It is called voluntary exchange or Trade.

The minute they hear the word trade, many people think of Ricardo, international trade, and globalization.   It is more important to go back to Adam Smith and think of specialization and trade in a domestic economy.   Think pin making, think butcher, baker and brewer.  Ricardo's comparative advantage lends equality and the raising of the least well endowed of society or the world to the benefits mix.

If Caruso and Friday meet and one has gathered berries while the other fished and they trade, both, because of their different values for each commodity at the time of the deal, gain satisfaction.  With little or no more effort.  This is free lunch, or nearly free if one subtracts the friction of transaction costs.   Difference in utility, the value of an object, discerned in the eyes of the beholder, unknowable by an outsider in absolute value and often unfathomable, is opportunity.  Because all men and women are different and hold different values placed on a good at a time they can voluntarily exchange and both can increase their wealth.

My child recently took the principals of microeconomics course at his university.  I was dumbfounded to find that they did not cover, nor test, on specialization and trade in the class.

The single most important thing one can learn in economics is specialization and trade.

Accurate Reality:  Voluntary free exchange makes both parties better off.  Free lunch.  A college economics professor that skips teaching this in favor of other, more trendy or politically correct or even currently discussed topics, to his or her students has been negligent and should be instructed by the department chair on teaching priorities.

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