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Source link: http://archive.mises.org/8234/cooperation-how-the-free-market-benefits-everyone/

Cooperation: How the Free Market Benefits Everyone

June 27, 2008 by

The following attempts to explain the most important idea in the history of social analysis. The notion (actually, it’s a description of reality that is all around us but rarely noticed) has been around for centuries. It was first observed by ancients. It was first described with rigor by late-medieval monks working in Spain. It was given scientific precision in the classical period. It is the basis of advances in social theory in the 20th century. The failure to comprehend this idea is at the very root of the pervasive bias against liberty and free enterprise in our times, on the Left and the Right. FULL ARTICLE

{ 18 comments }

Matt June 27, 2008 at 9:24 am

Excellent Article.
Now how do we get the Nerds in Washington to understand this? McCain especially would greatly benefit since he admits he is an Economic Illiterate.

Neal W. June 27, 2008 at 9:27 am

Nice article, it will make a good reference.

fundamentalist June 27, 2008 at 10:10 am

Great article! Thanks! Comparative advantage is one of the great secrets of Western success. It’s a shame that so few people understand it. If schools were doing their job, they would begin teaching this in kindergarten.

The problem is that it’s not intuitive. Mercantilism is intuitive: total wealth is fixed so that one person gains wealth at the expense of another. My three children seem to have been born mercantilists and it took me years to get it out of their heads.

Critics claim that comparative advantage doesn’t create a perfect world. Injustice, poverty and cruelty still exist after its implementation. Sure it lifted standards of living of the average Joe beyond the dreams of even the nobility of the past, but that’s not enough. The world isn’t perfect and some people are determined to make it so no matter how many people die. The hardest lesson for people to learn is that the problem with perfection lies in the fact that people are not perfect. People determine the character of society; society doesn’t make people. As long as people are imperfect, society will be imperfect. Religion has had the longest history of trying to establish the “kingdom of God” on earth with disastrous results. They attempted it even though Christ warned them against such an attempt. Atheistic communism attempted the same goal in the 20th century and killed close to 100 million people before fizzling out.

We have to get over intuitive mercantilism and the delusion of perfection before we can appreciate the “miracle” that comparative advantage has created.

BlackSheep June 27, 2008 at 10:59 am

«Comparative advantage is one of the great secrets of Western success.»

I agree and it is the reason why the much regulated, and taxed economies of the developed countries continue to unmeasurably out-perform those of the 3rld world nations that pursuit policies of high tariffs and spiral inflation, completely ruinous for the division of labor.

Don Duncan June 27, 2008 at 12:07 pm

I would only delete one(1) word from this essay. Where he says: “tyrannical rule” delete “tyrannical”. This would avoid the myth that government is necessary.

Michael A. Clem June 27, 2008 at 12:58 pm

Good article. You mentioned it, but it would be nice to explore a little further, the idea that comparative advantage means that nobody is “lording it” over others because they need the cooperation of others to increase their productivity.

Matt June 27, 2008 at 2:09 pm

“It is becoming clearer how a person’s work is naturally interrelated with the work of others. More than ever, work is work with others and work for others: it is a matter of doing something for someone else. Work becomes ever more fruitful and productive to the extent that people become more knowledgeable of the productive potentialities of the earth and more profoundly cognizant of the needs of those for whom their work is done.”

Now whether the “law of comparative advantage”
is imbedded in the above quote is highly doubtful,
considering the mealy-mouthed “productive potentialities of the earth” expression.
The historical and present day Animus of Capitalism expressed by the Church is well known.

fundamentalist,
“As long as people are imperfect, society will be imperfect.”
Perfection is impossible, change is constantly at work in very aspect of our lives as it is with all other aspects of the world and the universe. Perfection is a religious notion that if it could exist, life could not exist…If you seek perfection you seek death.

P.M.Lawrence June 27, 2008 at 10:56 pm

There are actually catches in this. For instance, if you are in a distorted economy, it can often happen that removing just one distortion leaves the overall economy more distorted! That would happen if the remaining distortions were enough more correlated to offset the reduction in their number.

Here’s a historical example. The Methuen Treaty reduced trade barriers between Britain and Portugal, so they could trade British wool for Portuguese wine more freely. It’s often touted as an example of comparative advantage working out, because both countries gained.

Only, it was a mercantilist measure, aimed at cutting off British imports of French wine and Portuguese imports of Spanish wool, giving preference to inferior British wool and Portuguese wine. France and Spain – traditional British and Portuguese enemies and rivals – suffered. It’s quite possible that there was an overall reduction in the European economy; it depends on just how heavy the previous tariffs were, and how they were split among all four countries. Other British and Portuguese taxes had to be raised to compensate for revenue loss, and similarly for French and Spanish ones, and it so happens that many taxes have more deadweight losses than small tariffs, particularly if the replacements aren’t small to begin with (roughly speaking, the typical deadweight losses of a tax are proportional to its square, and tariffs often have lower constant factors to multiply that square by – and that’s even before we look at Pigovian cases where other imperfections make optimal rates of taxes and subsidies non zero).

So it’s all very complicated, more than might appear even after reading that article. That cake/bagel illustration takes place in a distorted labour market in real life, where zero additional bias to the labour market is in fact sub-optimal for the wider economy, so it too could well have a whole lot of “things not seen” making it less of a gain or even a loss to some “forgotten man”.

Joseph Huang June 29, 2008 at 8:59 am

in your case, the problem is further distortion due to taxation. the problem is not removal of tariffs. and what the heck is the “wider economy” and who said you decide what is good or bad for it? you are the decider? who are you to say what is inferior wool?

there are no pigovian cases. if there is a violation of property rights, it should be dealt with in a voluntary court. the parties cannot agree on a court, it should be played out in the press and by social ostrasicsm. there is no room for the pigs here. the idea that “bad stuff” should be taxed instead of eliminated is quite silly. no one should benefit from pollution, but under pigovian ideas, the government gets more money. why the government? because they have the most guns, and are willing to use them. this is mafia justice, not real justice.

P.M.Lawrence June 29, 2008 at 11:10 pm

Joseph Huang, I know damned well that “the problem is further distortion due to taxation”. That was the point I was making, that if you remove just one impediment while leaving others, things can get worse.

You are mistaken in stating that “the problem is not removal of tariffs”; it is, if you just do that here and there.

The “wider economy” is everything else, including the “things not seen” that Bastiat talked about.

As for “who said you decide what is good or bad for it?” and “you are the decider? who are you to say what is inferior wool?”: I am not deciding, I am reporting, since we know damned well which wool and wine people preferred when there was no bias between those four countries; and, we know damned well that Spain tried to keep Britain from getting its sheep breeds like the Merino but Britain took them as soon as it could, and we even know how wool was graded for quality.

You are mistaken in thinking “there are no pigovian cases. if there is a violation of property rights, it should be dealt with in a voluntary court.” The second sentence is only relevant when property is set up that way, but sometimes it isn’t. You get Pigovian cases when there aren’t property institutions in place and there are also external costs but a subsidy or a tax would undo that bias, and that really can happen. For instance labour markets externalise the cost of unemployment, as vagrancy costs of “sturdy beggars” in times and places with no or inadequate welfare systems or as the cost of funding those systems when they are there.

There is a misunderstanding in “under pigovian ideas, the government gets more money”. For one thing, if it paid Pigovian subsidies, it would get less, or it might not even be involved if some other institution was handling things, say a charity paying out a Pigovian subsidy funded from an endowment, or collecting rents that it set in a Pigovian way. It’s just that governments try to use ideas like these as an excuse; you’ve bought into their propaganda, believing that Pigovian implies “give to the government”. Even if the government was running a system, it still might not get more money. Look at Professor Kim Swales‘s suggested approach to unemployment. That’s a virtual Pigovian subsidy which wouldn’t give them more.

newson June 30, 2008 at 10:54 am

pm lawrence says:
“The “wider economy” is everything else, including the “things not seen” that Bastiat talked about.”

bastiat was referring to domestic political economy only. countries act purely in self-interest, tariffs are unwise not only for their impoverishment effect domestically, but naturally for the countermeasures taken up by trading partners.

i fail to see why any state should concern itself with the welfare of any but its own citizens. when we get subsidized greek olive oil here in australia, we should send thank-you notes to the suffering eu taxpayers, not worry about how distortions play out in europe. gift horse’s mouth.

P.M.Lawrence June 30, 2008 at 11:00 pm

Newson, you can’t have it both ways. The self-interest point lets mercantilist measures in the door, if you are in an already distorted world economy. When the conditions are right, mercantilism really does work for one of the actors. The whole point is, in certain circumstances there are yet other market distortions around, so some particular mercantilist option is win-lose rather than lose-lose. Then, simplistic self-interest points you at the mercantilist option, particularly when it is called free trade because it superficially looks that way like NAFTA or the Methuen Treaty. Of course, agreeing not to do it and sharing the gains makes it win-win – but if you don’t share the gains, it’s win-lose, so you get things like the Erie Canal (which was a gain for the USA by diverting Great Lakes trade away from Canadian ports, not by enabling trade that wouldn’t otherwise have happened). Bastiat’s argument is more general than “domestic economy”, so it also highlights these broader repercussions.

newson July 1, 2008 at 3:43 am

to pm lawrence:
well, mercantilism certainly enriches some citizens, though not the majority who consume rather than produce whatever product is the subject of the tariff.

so let me rephrase. i don’t see why the state should concern itself with anymore than the welfare of its own citizens, who in turn are to be dealt with impartially.

as for nafta (“free trade” – sad misnomer) – impossible to conclude there are any net benefits, due to trade diversion (unquanitifiable).

bottom line, i fail to see how mercanitilism can possibly benefit even one country. it’s counterintuitive; even if injured trading partners don’t respond in kind (unlikely), the populace’s choice is still constrained. limiting competition is always damaging to consumer welfare.

P.M.Lawrence July 1, 2008 at 10:56 pm

Newson, I meant very specifically that in certain circumstances this or that mercantilist policy will make a net gain for its practitioner state taken as a whole, e.g. the Erie Canal. It is then quite possible for it to ensure that every one of its citizens gets some gain, though of course it usually doesn’t. I am not referring to the usual case, which you are taking as invariable, in which there are some gainers who lobby successfully but there is a net loss so that there are bound to be some who lose. It is quite possible for there to be all winners in one country. Of course, even things like the Erie Canal would not have had as much all round gain as not building it, and there would have been more individual gain if it had not been built and British gains had been shared with Americans – but the unilateral US action didn’t hurt any of its citizens and helped some. Of course, the USA didn’t fully appreciate the point and made other “internal improvements” which really only moved wealth around inside the USA and cost all the misallocated capital, but the Erie Canal didn’t take any wealth away from the USA, just from Canada. (It had a strategic justification too, which is clearer with the corresponding Canadian canal, the Rideau Canal.)

newson July 2, 2008 at 2:27 am

to pm lawrence:

as far as public works producing net benefits to the public (the eire canal, in your example) – well, that’s usually the pitch behind all capital outlays by the state. i don’t buy it. if private syndicates can’t or won’t come to the party, then it’s purely and simply because the returns aren’t there. you can rationalize it as being in the national interest (the spiel), but clearly the npv is negative.

newson July 2, 2008 at 2:29 am

to pm lawrence:

as far as public works producing net benefits to the public (the eire canal, in your example) – well, that’s usually the pitch behind all capital outlays by the state. i don’t buy it. if private syndicates can’t or won’t come to the party, then it’s purely and simply because the returns aren’t there. you can rationalize it as being in the national interest (the spiel), but clearly the npv is negative.

P.M.Lawrence July 2, 2008 at 8:43 am

Newson, that was precisely the point I was trying to make. The Erie Canal did not produce “net benefits to the public”. Mostly, it diverted Great Lakes trade from the St. Lawrence to the Hudson, and so enriched New York at the expense of Montreal and Quebec (with a slight gain from having an ice free sea port available all year). Result: it was of immense benefit to the US public, but not to “the” public, and so made sense as a US mercantilist measure.

As for the argument about a lack of private investors – well, some did chip in, but equally they had opportunities in the existing trade (most investment capital was European, after all), and of course there was little reason for private investment when public investment was crowding it out; far better to apply private funds to rent seeking lobbying than to competing with public efforts (like the towns that lobbied to be the Erie terminus – Buffalo won, and hardly anybody remembers the other now). One might as well argue that most parents wouldn’t be willing to pay to educate their children, using the fact that so many use state education as evidence; it entirely ignores the crowding out.

P.M.Lawrence July 2, 2008 at 8:46 am

Newson, that was precisely the point I was trying to make. The Erie Canal did not produce “net benefits to the public”. Mostly, it diverted Great Lakes trade from the St. Lawrence to the Hudson, and so enriched New York at the expense of Montreal and Quebec (with a slight gain from having an ice free sea port available all year). Result: it was of immense benefit to the US public, but not to “the” public, and so made sense as a US mercantilist measure.

As for the argument about a lack of private investors – well, some did chip in, but equally they had opportunities in the existing trade (most investment capital was European, after all), and of course there was little reason for private investment when public investment was crowding it out; far better to apply private funds to rent seeking lobbying than to competing with public efforts (like the towns that lobbied to be the Erie terminus – Buffalo won, and hardly anybody remembers the other now). One might as well argue that most parents wouldn’t be willing to pay to educate their children, using the fact that so many use state education as evidence; it entirely ignores the crowding out.

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