Exchange as the Basis of Everything Social
In a world where individuals were perfectly equal, they would be perfectly solitary. Individuals try to trade—exchange goods and services, including personal sentiments—because it is in each one’s interest to do so; and it is in their interests to do so because they are unequal, that is, different in their preferences (tastes) or in their production possibilities, or typically in both.
If you have an orange and I have an apple while I prefer oranges and you apples, we will trade.
But even if we have the same preferences—to take a simple example: we both prefer a diet of 1/3 apples and 2/3 oranges—it will be in the interest of each of us to specialize in the production of one or the other fruit as long as each has different production possibilities, whatever the source (nature, nurture, habit, or even third-party interference) of this difference. If I have to sacrifice the production of more apples when I produce an orange than your own production cost (of an orange in terms of apples forgone), I will produce only apples and you will produce only oranges. By trading the largest part of my apple production against the largest part of your orange production, I will obtain more oranges and you more apples. This is called the law of comparative advantage; more complex models can be entertained, but the result remains basically the same. (Don Boudreaux has an especially clear and short explanation at Café Hayek, March 31, 2022.)
One implication is that bans on exchange by a third-party—for instance, the current American and international sanctions on exchanges involving certain Russian individuals—impose a cost on both sides. The only reason, if there is one, for such bans is that they are temporarily indispensable to maintaining a general context of free exchange in the future. (One caveat is that “temporary emergency” is not an expression that Leviathan recognizes.)
Bans are coercive and are imposed and enforced by political authorities (or mafia- or mob-types of authority), which raises the whole problem of the justification of the state and state action. James Buchanan’s economic approach to this pollical-philosophical problem is especially interesting: it considers politics as another type of exchange, this one regarding the basic rules of life in society (see my review of his book Why I, Too, Am Not a Conservative in the current issue of Regulation, as well as my review of his joint book with Gordon Tullock, The Calculus of Consent, on Econlib). In Buchanan’s perspective, political authorities are justified to impose such rules only if a strong presumption exists that they are in the interest of all their subjects or citizens, which is the same as saying that they are indispensable to maintaining a general context of free exchange for the future. Note that given the moral values at the basis of the (classical) liberal society, the welfare of foreigners must also, in some way, be taken into account.
Whether Buchanan is right or not on the details, understanding the issue in economic terms, which means in terms of exchange between parties supposed to be “natural equals” (even if their preferences and circumstances are different), does seem essential. In Why I, Too, Am Not a Conservative, Buchanan wrote (p. 17):
(1 COMMENTS)Without either a generalized understanding of basic economics or a widespread willingness to defer to the warnings of those who do understand, maintenance of any liberal order becomes impossible.