In every economic exchange, both sides benefit, each from his own individual, personal perspective. That’s because each trader gives up something he values less for something he values more. Thus, at the moment of the trade, each of the traders is better off than he was before the trade. The standard of living of both traders has been improved by the simple act of trade.
Got it?
Okay, well then, here’s your first Pop Quiz:
Suppose John has 10 apples and no oranges and that Robert has 10 oranges and no apples. Suppose they enter into a trade in which John gives 2 apples to Robert and Robert gives 8 oranges to John. So, after the trade, John ends up with 8 apples and 8 oranges and Robert ends up with 2 apples and 2 oranges.
Pop Quiz Question 1: Have both John and Robert improved their standards of living with this particular trade?
Pop Quiz Question 2: Is the exchange between John and Robert fair?
If you answered “Yes” to both questions, you get an A+. If you didn’t, unfortunately you’ve got to repeat the class.
The reason that both John and Robert have increased their standard of living through the trade they made is because they both gave up something they valued less for something they valued more. How do we know that? Simply by the fact that they both voluntarily entered into the trade! If they both didn’t perceive a gain from the trade, one or both of them would have walked away and not made the trade.
The exchange is entirely fair because both of them voluntarily entered into it. The number of apples and oranges traded is irrelevant. All that matter is that at the moment of the exchange, both John and Robert were both giving up something they value less for something they value more.
There is an obvious corollary to this principle: Whenever any government law, edict, regulation, or rule interferes with people’s ability to trade, to that extent the government is lowering people’s standard of living.
Let’s assume, for example, that some government bureaucrat thinks that it’s not fair that John ends up with 8 apples and 8 oranges and that Robert ends up with 2 apples and 2 oranges. The bureaucrat steps in and prohibits any trade from taking place that isn’t 5 and 5 — that is, one in which John and Robert each end up with 5 apples and 5 oranges.
Given that regulation, what does John do? He walks away from the transaction. It’s not worth it to him. He values his apples more than the oranges. If he enters into the trade, he has lowered his standard of living, from his own perspective. If the bureaucrat employs force on John, compelling him against his will to enter into the trade, John’s standard of living falls for the same reason.
This principle of trade applies in every economic exchange. That includes trades involving labor contracts. When an employer and an employee enter into a work relationship, both of them improve their standard of living regardless of the particular wage they agree upon. The employer is giving up something he values less — i.e., the money he’s paying his employee — for something he values more — i.e., the labor services of the employee. The same goes for the employee: He is giving up something he values less — i.e., his time and other opportunities — for something he values more — i.e., the money he’s receiving from the employer.
Pop Quiz time again:
Pop Quiz Question 1: Suppose the employer and employee have agreed on a wage rate of one dollar an hour? Has the employee suffered a decrease in his standard of living?
Pop Quiz Question 2: Should the government mandate a higher wage to be paid in this transaction?
If you answered “No” to both questions, you get an A+. If you didn’t, alas, you have to repeat the class.
Remember: in every economic exchange, both sides benefit. Otherwise they wouldn’t enter into the exchange. Whatever is given in exchange, the party to the trade values it less than what he is receiving in return.
Suppose some meddling, do-gooder government bureaucrat mandates that the employer has to pay more than a dollar to the employee. In that case, the employer simply walks away from the deal and the labor relationship does not materialize. Since the bureaucrat has prevented this particular labor exchange from taking place, he has lowered the standard of living of both parties to the transaction.
That concludes this mini-course in trade, except for the Final Exam, which is as follows:
When government imposes sanctions, embargoes, trade restrictions, tariffs, price controls, economic regulations, immigration controls, and minimum wage laws on society, does that improve or lower people’s standard of living?
If you said “lower,” you get an A+ and graduate with honors. If you said, “improve,” well, you know what that means.