The Centrality of Exchange – Econlib

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Most government interventions consist in forbidding adult individuals (or their voluntary associations) to freely engage in acts of exchange: securities laws, antitrust laws, minimum-wage laws, maximum prices (like in price gouging laws, for example), laws and regulations mandating or banning discrimination, legal privileges for trade unions, tariffs and import controls, and so forth. Some believe that all these interventions are required, and required in growing number.

Many people including some economists ignore or forget the benefits of voluntary exchange. In The Wealth of Nations (1786), Adam Smith illustrated the centrality of exchange in economic relations (and, in fact, in all social relations) when he wrote about

a certain propensity in human nature the propensity to truck, barter, and exchange one thing for another. Whoever offers to another a bargain of any kind, proposes to do this: Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.

This is a positive statement, which describes a distinctive way in which human individuals often behave: they engage in acts of voluntary exchange when it is in their mutual interest to do so. Smith also showed that a society based on free exchange is the secret to general prosperity. All animals including humans, however, also use force (murder and theft) as an alternative to exchange. This suggests a normative (that is, moral) idea: free exchange should be the founding principle of social interaction.

One common objection is that the individual does not really know what is good for himself and should, in his own interest, have his choices, or some of them, coercively limited or dictated by political rulers. The problems with this objection are many, as the public-choice school of economics has confirmed. There is nothing to prove that such an authoritarian ruler, whether representing a minority or a majority, can know better than each individual what is good for him given his own circumstances. Even if the ruler could know, his altruistic incentives would be generally lacking. And even an altruistic despot (or despotic assembly) would be unable to act for the good of each and every individual, for different individuals have different preferences and values.

Another objection is that market exchange fails because of “externalities” and other market imperfections. The proponents of this approach don’t seem to realize that government intervention is generally subject to even more failures than exchange on free markets. (See a short review of the problem in my Econlog post “Externalities: Handle with Care.”)

James Buchanan, one of the main founders of the public-choice school of economics, expresses the principle of free exchange in a way that puts in sharp focus the revolutionary character of the normative approach suggested by economics:

If I observe someone with apples and somebody else with oranges, I dont want to try to say a particular allocation of oranges and apples in a final position is better than in the other allocation. If I observe them trading without defrauding each other, whatever emerges, emerges, and that is the way I define what is efficient.

That this quote comes from a conversation between Buchanan and Richard Musgrave, a major theorist of mainstream public finance, shows the extent of the mini-revolution that the former introduced into the already revolutionary science of economics (James M. Buchanan and Richard A. Musgrave, Public Finance and Public Choice: Two Contrasting Visions of the State [MIT Press, 1999]). In the same book, Buchanan argues:

As for global or social utility or social welfare, I am not willing to impose any sort of maximand. Whatever emerges from individual choices emerges, and it is not a question of imposing a kind of global maximization process.

My concern and my primary motivation here in a normative sense is preventing the exploitation of man by man, or woman by woman, through the political process. That is what is driving my whole approach.

Buchanan dreamed of, and theorized about, a state that would be based on politics as exchange, trying to mimic in politics free exchange between free individuals on free markets. To which extent his ambitious and sophisticated demonstration was successful remains an open question.

Speaking about the 20th century, which continues in the 21st with a vengeance, Buchanan added:

This terrible century has done much more than bear witness to the tragic failures of collectivist controls over personal lives.

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