Interestingly, I think this is pretty obviously stated in The Wealth of Nations; Chapter 1 identifies division of labor as the cause of capital accumulation, Chapter 2 identifies trade as the cause of division of labor, and Chapter 3 identifies the size of the market as a limiter on specialization.
This is... actually sort of surprising that now I have two examples of economic concepts which are really better explained by Adam Smith than they are by modern textbooks (the other is supply and demand), and this makes me even more glad that I read The Wealth of Nations in high school before I had come across any modern textbooks.
All that just to get to the point of trade being to leverage comparative advantage into unlocking more value in the economy, which is the actual textbook reason for trade. Don't get me wrong, this was an enjoyable read and illustrates that heterogeneous preferences is an appealing but inadequate answer to why we trade. The post also gets at various reasons comparative advantage might come about (nice), but without actually naming the broad concept that umbrellas these things together to explain the benefit of trade. Comparative advantage, whether it exists because you (or the organization, or country, or whatever entity is the unit of analysis) have task-switching costs, are closer to the means of production, are inherently better at the task, have accumulated more experience with the task, or (looking to the comments now) have accumulated more capital devoted to the task via path dependencies, is the reason for trade. The point of trade is to unlock the added value that resides in making more efficient use of scarce resources.
Other magical powers of trade:
- Economies of scale. It is basically as easy for me to produce 20 sheets of paper as to produce 1 ; after paying the set up costs the marginal costs are much smaller in comparison. So all in all I would rather specialize in paper-making, have somebody else specialize in pencil-making, then trade.
- Investment. often I need A LOT of capital to get something started, more than I could reasonably accumulate over a lifetime. So I would rather trade the starting capital for IOUs I will get from profit.
- Insurance. I may have a particularly bad harvest this year and a very good one the next one, while my neighbour might have the opposite problem. All in all I would rather we pool our harvests each year, so that we can have food both years. So we are "trading" part of our harvest for insurance.
Things worth buying in a Matrix universe:
- Art. Even if I had the skill to make it in the same quality, I would probably enjoy art made by someone else more; for example because I don't know how the story will end.
- Invention. I can invent a gadget, and you can invent a gadget, but if we trade, we will have invented two gadgets in one unit of time.
In both cases, the missing magic is artificial intelligence.
Maybe I was projecting a smarter argument onto my economics textbooks than was actually there, but I always understood them a little differently: two people gain by trading apples for oranges when they value (not like) their trade goods in different ways. How much you value something depends on how much you like it, but also on other things too: how easily you could find or make your own without trading, how much you value something else that the thing makes possible, how much of the thing you already have, how uncertain your expected future preferences are, and so on.
I think this distinction dissolves the rest of the dialog. If you're close to the apple orchards and I'm not, or you're an expert apple farmer and I'm not, or you've invested capital in apple-growing machines and I haven't, then you'll have an easier time getting apples than I will and you won't value them as much.
In this account, trade creates wealth indirectly, by incentivizing production and specialization. In a world where there weren't any distinctions of value -- where people genuinely didn't care whether they had apples, or basketballs, or copies of Twilight -- gains by trade wouldn't be possible. I can't picture a world like that, though; even replicators don't seem like quite enough.
My guess:
- Organizational capital: even with all the assumed magic, some jobs need several people to work together. Absent organizational tech, it takes time to organize people and coordinate on a project. Firms can specialize in being well-organized and well-coordinated to produce a set of goods.
- Other physical capital: will a well-organized group of people really be able to extract oil, just by knowing exactly how to do it? No. Even if they have the resources to pay the fixed costs and enter the market, they still have to purchase the equipment, set up the supply chains, etc (even with teleporters, since you have to organize what stuff goes where, from where - although now we're getting into organizational capital again). Even if you and your colleagues are well-organized, you aren't going to extract oil or build a stadium without the right equipment.
My guess for missing things:
Economies of scale - it's probably easier to produce a lot of steel from a lot of iron, per unit kg of steel, than with a little bit of iron. So you want there to be concentration of raw materials.
Diminishing marginal returns - so this pushes towards a uniform distribution of everything
Here are at least two things that add to gains from trade:
Shared Equipment:
If you have to independently produce pickaxes, trucks, rails, a smeltery, etc. before you are able to spend your N units of human effort to mine the N units of iron you need, you can gain by purchasing the (right to use the) mine and equipment someone else already produced and isn't using right now/any more.
and
Intellectual Property:
Imagine you have to additionally find where to mine for iron, invent a shovel, and also independently discover that there even is such a thing as iron and that it is useful for whatever purpose.
All right, suppose that all of us liked exactly the same objects exactly the same amount. This obliterates the poorly-written-textbook’s reason for “trade”.
This is nonsensical, because whether an individual person likes something is not a constant. If everyone liked oranges just as much as apples,, trade would still be possible because the 1st orange is preferable to the 99th apple and the 1st apple is preferable to the 99th orange.
1Part of the confusion here is over what the word "trade" means. I'm actually pretty sympathetic to the proto-justification given that, "The point of trade is that sometimes people get different amounts of value from things, so they can get more value by trading them." It's just that, even in a society where everyone shares the same values, we get efficiency from specialization.
It seems like a further stipulation to refer to "specialization and transportation of resources" as "trade" if every party involved has the exact same values. Consider a colony of an...
people can share expertise via Matrix-style downloads which are free
Just because people can share their expertise for free doesn't mean that they will. If Alice has practiced her orange-picking skills more than Bob has, it makes sense for Bob to give Alice some fruit in exchange for Alice's superior expertise.
Two of the removed features are removed incompletely.
Differerences in preferences. What is important for trade is the marginal preference. So to remove this motivation to trade one mus assume the marginal value (both intrinsic and instrumental) to be equal for everyone for all goods, which i think can only happen in some very weird cases (eg all gods have no instrumental value and utility is a linear combination of the products).
The difference in peoples productive capacity (which doesn't by itself result in trade (it does when assuming diminishing margina...
Curated. I enjoyed how this post was a little journey of deconfusion from the inside. It went through some of the actual cognitive motions one might make when trying to understand economics. (Or, rather, when trying become less confused about questions like "Why does everyone's lives today seem so much better than people I read about in history books?" or "How is it that the guy at Papa John's down the street can spend a few days making pizza, and then go to the store... and return with a little all-in-one pocket camera-computer-telephone-thing more powerf...
A few things that seem relevant (5 things, but maybe not crystallized in the right way to be 5 separate answers to the OP's question):
Quantity: mismatch between natural quantity produced and quantity desired. Maybe I can plant an apple tree & pick the apples, but I don't want a whole treeful of apples. Maybe the most efficient way to make t-shirts is to build a big machine that makes a million shirts, and a process for making just 10 of them is wildly inefficient in terms of resources per shirt. (related keywords: economies of scale, capital investment...
Even in the final hypothetical world, there are still enormous gains to be had from specialisation. Gains from specialisation arise because while a person may be imagined to have zero task-switching cost, most tasks still have non-zero person-switching cost in that hypothetical world. Specialisation necessitates trade, so that each person can get what they need but do not make from the people who make those things to trade for what they need. (One could talk about trade being unnecessary in a “perfectly planned” economy, but that would be going off in a di...
Looking through the comments, it seems like most of my thoughts have been captured (economy of scale, collaboration producing non-linear accumulation, etc) But some of the others (risk management, the time axis of logistics) helped me come up with a new one: perishability. When we combine some of the other factors (especially risk) people will at times have a perishable surplus. At these times they would seek to convert this surplus to something non-perishable or some other thing that they need at the time. If we had a society as described above plus uniform starting conditions and everyone used the same dice-rolls (i.e. everyone had the same good/bad corn year), I believe this reason for trade would cease to exist
.
One more magical power of trade, that I didn't see in other comments:
Planning and logistics. It takes about a week and a dozen steps to make a pencil. (Ok, probably not all dozen of those steps need human intervention, but some probably do.) That's not too bad; I can set a Calendar reminder to ping me when various steps are done so I can move the materials to the next one. But to use reminder software I need a laptop. How long and how many steps does that take to build? I would guess years of time and tens of thousands of steps. So even if I technically co...
Working for a salary is also fundamentally a form of trade. In my case, I trade my time and expertise in writing software, and my company pays me.
Purchasing items is also trade - I trade the money I earned to buy goods and services from others.
To completely eliminate trade, I think people would need to be able to magically wish anything they desire into existence. (If you've watched The Good Place, I'm imagining something like what Janet is capable of.)
At that point, scarcity no longer exists. And since the main point of economics is to solve problems of scarcity, economics doesn't have much purpose either.
In advance of other comments:
1. Declining marginal utility of specific goods and non-uniform initial distributions of goods over people (this one matters).
2. There is a finite length of the production chain that one person can accomplish if something would take longer than an entire human lifetime to produce. Suppose I luck into a massive amount of unobtanium, with perfect property rights. To some extent this is 1, but I might also desire goods that I could not produce in an individual life, and by trade acquire them (this one isn't that critical).
3....
Specialization. Yes. I've been making an induction puzzle game over the past couple of years. It takes place largely on the workbench of a reverseng (derivation: Reverse Engineer) employed by a drone factory that is situated in a late industrial society (a few years after creating misaligned AGI, so hardened by its state of biological warfare that it will last a few years yet).
One of the organizing principles that has allowed your world to run so terrifically fast is "Specialism", which holds that a person's profession should cast a long shadow over their ...
There's still the problem that two people can't occupy the same space at the same time, so we need people to be able to swap places instantly. This then requires some coordination, which is mentioned below.
Some commenters have mentioned economy of scale—It can be more efficient to pool together resources to make a bunch of one thing at a time. For example, people want paperclips but they could get them much faster if they operate a massive paperclip-making machine rather than everyone making their own individually. I think this is already covered though, a...
Intellectual property seems like another important thing. For example, a game like Cyberpunk 2077 takes man-centuries of work to produce, but once it has been created, producing additional copies for trade is cheap. In the no-trade world, everyone has to recreate all the IP for themselves.
First: I'm also thinking of 'getting paid for a job' as a trade, fundamentally it's 'generating value' for money. It's similar with most investment opportunities: they either provide (immediate) value or have the capability to generate value. This will stay at least until no one needs that anymore, maybe because everyone is being administered by an AGI and robots, so no one has to work.
Second: Sharing fruits of labor/economies of scale. Basically the physicalized version of 'expertise sharing', e.g. I'm going to build your house while you're out working, b...
I would put it like this:
- Comparative advantage
- Incentive to produce
- Distributing differential value (could be better phrased)
The option to make exchanges that increase my total value, incentivizes me to use my comparative advantage to produce new things that will be low value to me, but high value to others, so I can trade them. This increases the total value in the economy by both creating new value and distributing it in a more beneficial manner.
If the textbooks you've read leave you needing to figure these things out on your own, may I recommend David Friedman's 'Price Theory: An Intermediate Text', readable for free on his website. (I don't know enough about econ to either endorse or anti-endorse the sections that argue against government intervention in markets but it does nicely explain his position on such things.)
A neat thought experiment! At the end of it all, you no longer need to exchange fruit, you can just keep the fruit in place and exchange the identity of the people instead.
This is sort of hand-waving away the problem of locality. Star Trek transporter or not, there is only a finite space on which certain things can be easily produced. And this production space is embedded in time as well as space.
So you must also add to this hypothetical world that the production space(s) must be large enough to accommodate each person's self-production at an arbitrary point in time (to avoid task switching/ allocation friction). I.e. the iron mine must be large enough to accommodate everyone on earth at the same time.
A spatial framing:
(1) All objects have positions in space
(2) The desire by people to consume and use objects is not uniform over space (cars are demanded in Los Angeles more than Antarctica)
(3) The productive capacity to create and improve objects is not uniform over space (it's easier to create iron ore from an Australian mine, or a car at a Detroit factory)
(4) Efficiently satisfying the distribution of desires over space by the distribution of productive capacity over space necessarily involves linking separate points in space through transportation of g...
As we all know, studies on separated identical twins show that happens every single time, with no exceptions.
points of trade
Information exchange.
Even if you have teleports, you don't know where things are. Distribution of resources still matters even with 'equivalent desires' - if a car needs iron and platinum and other things and I have iron and you have platinum...neither of us has a car. (If the teleports have zero energy cost, or involve perpetual motion machines the case for 'why trade' just changed dramatically.)
Sharing information easily doesn...
Can't we simplify and say that the point of trade is to alter the entire system so that the final state is of higher utility to both participants than the initial state?
You have 2 apples and I have 2 oranges, but we both prefer the state where we have 1 of each fruit.
We both work 1 hour in the mines and 1 hour on the fields, but we both prefer the state where the skillsets of individuals overlap less.
At the end of your list the point of trade still exists, it's just the list of viable trades has been reduced.
Sometimes, in trading, one accepts a fixed value and in exchange offers something in return of near infinite value to all of society until the end of time that others build upon.
The title kind of threw me a bit. At first I was thinking a long the lines of at the time of trade. Clearly a different direction.
I also find myself a bit in disagreement with pretty much all the responses and perhaps the point of the post. What everyone seems to be talking about is not what I would call the point of trade. I would call them all the forces towards trading, the enablers of trade opportunities or something along those lines.
This is not to say everything said doesn't have a place in a model. But they all seem one step away. Most of what was s...
Them: The point of trade is that there are increasing marginal returns to production and diminishing marginal returns to consumption. We specialize in producing different goods, then trade to consume a diverse set of goods that maximizes utility.
Myself: Suppose there were no production possible, just some cosmic endowment of goods that are gradually consumed until everyone dies. Have we gotten rid of the point of trade?
Them: Well if people had different cosmic endowments then they would still trade to get a more balanced set to consume, due to diminishing ...
I really enjoyed this. Taking the time to lay this out feels more useful than just reading about it in a textbook lecture. The same way doing a math or code problem makes it stick in my head more. One of the biggest takeaways for me was realizing that it was possible to break economic principles down this far in a concrete way that felt graspable. I think this is a good demonstration of that kind of work.
Some further magical powers of trade:
1 It seems to (at least under certain conditions) reduce the incentives of states to declare war, and thus reduces the massive wealth destruction that comes with inter-state war.
2 It allows new (productivity-enhancing) technologies and practices to spread faster.
3 It enlarges the potential market on which novel products may be sold, and thus improves the expected ROI from investments in technology/ product development.
4 Positive network externalities (e.g., the value I get from my personal smartphone increases as a function of the total number of worldwide smartphone users).
Many of those powers were about surpassing human difference, so I would guess towards more of that:
- Radical transhumanism, free-shared-expertise style, to make physical properties of one's body irrelevant to the outcome
- Free and riskless preference modification, so that when you need a hundred thousand chairs making them yourself is a perfectly enjoyable pastime.
Intertemporal arbitrage: buying corn when there's a bumper crop and selling it when there's a drought. How do we get rid of that? Either time travel or giving everyone lots of storage space and prior knowledge of all the goods he will ever need and their future abundance/scarcity time series.
Price signals arising from trade are also an incentive for consuming less of / producing more of scarce things to make them less scarce. Without the incentives of prices we'd need some other way of enforcing rationing of the finite capacity of the iron mines and communicating each person's marginal utility for iron. A borg hivemind.
My initial ideas (e.g. cases where time are important) are pretty well captured by other comments, but in reviewing my thoughts I noticed some assumptions I was making, which might themselves qualify as additional requirements to eradicate trade:
A) I assumed that the skill-download feature includes knowledge downloading and no task requires more 'knowledge+skills in active use at a time' than the human brain can feasibly handle. If this is violated, specialization is still somewhat valuable despite free and presumably-unrestricted knowledge-sharing.
If you ...
Going to go big here:
Trade has intrinsic worth. If both parties benefit from the trade, or both perceive themselves to have benefitted, trade's purpose has been accomplished. It's not about the things that are exchanged, but the people doing the exchanging. People enjoy trading.
Trading is fun. It makes you feel good when you make a "good" trade. What I mean by this is a trade in which you know you have benefitted and so has the other person. Or at least you know you didn't try to rip them off, which I think is an awful f...
Are we also presuming that you can acquire all desired things instantaneously? Even in a situation when all agents are functionally identical, if it costs 1 unit of time per x units of a resource, wouldn't trade still be useful in acquiring more than x units of a resource in 1 unit of time? Time seems to me the ultimate currency that still needs to be "traded" in this scenario.
(Content warning: econoliteracy. Dialogue based on an actual conversation, but heavily idealized and simplified and stripped of surrounding context.)
Myself: - seems unreal because it is unreal. But there's a river of reality running through it. If somebody reports that something complicated feels unreal and difficult to get a handle on, usually the first thing I prescribe is going back to the very very basics, and playing around with those to solidify the grasp there. If mathematics seemed unreal to someone, I'd take somebody back to premises-and-conclusions. In the case of complicated modern economical structures, I'd maybe start with trade. What's the point of trade? What does it do?
Them: The point of trade is that sometimes people get different amounts of value from things, so they can get more value by trading them. Like, if I have an apple, and you have an orange, but I like oranges more than apples, and you like apples more than oranges, we can trade my apple for your orange, and both be better off.
Myself: Yes, that is the horrible explanation that you sometimes see in economics textbooks because nobody knows how to explain anything. But when you are trying to improve your grasp of the very very basics, you should take the basic thing and poke at it and look at it from different angles to see if it seems to capture the whole truth.
In the case of the "people put different values on things", it would seem that on the answer you just gave, trade could never increase wealth by very much, in a certain basic sense. There would just be a finite amount of stuff, only so many apples and oranges, and all trade can do is shuffle the things around rather than make any more of it. So, on this viewpoint, trade can't increase wealth by all that much.
Them: It can increase the utility we get from the things we have, if I like oranges a lot more than I like apples, and you like apples a lot more than oranges.
Myself: All right, suppose that all of us liked exactly the same objects exactly the same amount. This obliterates the poorly-written-textbook's reason for "trade". Do you believe that, in an alternate world where everybody had exactly the same taste in apples and oranges, there'd be no further use for trade and trade would stop existing?
Them: Hmm. No, but I don't know how to describe what the justification for trade is, in that case.
Myself: Modern society seems very wealthy compared to hunter-gatherer society. The vast majority of this increased utility comes from our having more stuff, not from our having the same amount of stuff as hunter-gatherers but giving apples to the exact person on Earth who likes apples most. I claim that the reason we have more stuff has something to do with trade. I claim that in an alternate society where everybody likes every object the same amount, they still do lots and lots of trade for this same reason, to increase how much stuff they have.
Them: Okay, my new answer is that, through trade, you can get strawberries from far away, where they wouldn't be in season at all, where you are... no, that doesn't actually make more stuff. My new answer is that you can build complicated things with lots of inputs, by trading to get the inputs. Like if it takes iron and copper to build circuits, you can trade to get those.
Myself: If it takes 1 unit of effort to get 1 unit of iron either way, how can you get any more stuff out, at the end, by trading things? It takes 1 unit of effort to make 1 iron ingot, so go to the iron mines and mine some iron, then chop down the wood to prebake the iron ore for grinding before you put it into the bloomery. All of that has to be done either way to get the iron ingot. How can trading for somebody else's iron, instead, cause there to be more stuff in the economy as a whole?
Them: Because task-switching has costs.
Myself: Okay, suppose an alternate society of people who are really good at task-switching. They can just swap straight from one task to another with no pause. They also all have exactly the same tastes in apples and oranges and so on. Does this new society now have zero use for trade?
Them: Um... hm. (Thinks.) But they're not actually in the same place as the iron mines. So if they have to walk around a lot -
Myself: Suppose a society in which everyone has exactly the same taste in apples and oranges; everybody is really really good at switching tasks; and furthermore, the society has Star Trek transporter pads, so you can get to the iron mine instantly. Is there now no more use for trade?
Them: Some people are better miners and others are better fruit-growers?
Myself: Suppose a society with identical fruit tastes, and perfect task-switching, and Star Trek transporters, and furthermore everyone has identical genetics, as if they were all identical twins; which, as we know from identical-twin studies, means that everybody will have around the same amount of innate talent for any and all jobs. Like that case where two identical twins, separated at birth, who never knew each other, both ended up as firefighters. As we all know, studies on separated identical twins show that happens every single time, with no exceptions. I claim that even this society still has to do a lot of trade in order to end up with modern levels of wealth.
Now, do you think I'm trolling you and that we actually did get rid of the basic reason for trade, at this point, or that there's still something left over? Identical fruit tastes, perfect task-switching, Star Trek transporters, everyone is born with the same genetics and therefore identical innate talents. Do people now mine their own iron, or do they still trade for it?
Them: (Thinks for a while.)
Me: If the Sequences have taught you anything, I hope it's taught you that it's okay to state the obvious.
Them: ...people learn to do their jobs better with practice?
Myself: Human capital accumulation! Indeed! So now let us suppose identical fruit tastes, perfect task-switching, Star Trek transporters, identically cloned genetics, and people can share expertise via Matrix-style downloads which are free. Have we now gotten rid of the point of trade? As far as you can tell.
Them: ...yes?
Myself: Do you believe I'm going to say that we've gotten rid of the point of trade?
Them: ...no.
Myself: Well, I agree with your object-level answer, so your meta-level answer was wrong. I think we've now gotten rid of the point of trade.
Them: Darn it.
(Note: While contemplating this afterwards, I realized that we hadn't quite gotten rid of all the points of trade, and there should have been two more rounds of dialogue; there are two more magical powers a society needs, in order to produce a high-tech quantity of stuff with zero trade. The missing sections are left as an exercise for the reader.)