Wednesday, December 12, 2007

The Significance of Voluntary Transactions

One of the fundamental underpinnings of modern capitalism is the voluntariness of the transactions that make up the commerce in a capitalistic society. My patronage of a coffee shop, and the subsequent exchange of $4.00 for an eggnog latte, is voluntary by both parties to the transaction: I didn’t have to buy the latte, and the coffee shop didn’t have to sell it to me.

If a transaction is voluntary, it follows that each of the parties to a transaction would have executed this transaction only if it was perceived to be beneficial to them. Furthermore, where there are multiple alternatives, the selected alternative can be inferred to be superior to all of the other available alternatives.

This is an amazingly profound point.

Before discussing why this is profound, let’s make sure there is clarity around the assumptions. By voluntary, there can be no coercion to transact, whether from laws (e.g. having to pay a parking ticket) or friends (e.g. please loan me $20), and there must be a conscious decision to transact. By perceived benefit, the transactor has to think it is beneficial to him (even if it in actuality is not).

Here are a few applications of the ramifications of voluntary transactions:

  • “Fair Trade Coffee” – "Fair Trade" is entirely superfluous. Assuming that there is no forced labor anywhere in the supply chain for my latte, each participant in the supply chain is acting beneficially, and thus is bettering themselves by the transaction. Furthermore, their participation in this supply chain is not just beneficial but is their optimal transaction for their circumstances, so it is not just “fair trade”, but it is superior to “fair", since it is optimal. “Fair Trade Coffee” can do nothing to improve an already optimized supply chain, and hence it can really be nothing but marketing to the coffee consumer to make them feel better about drinking their coffee. “Fair Trade” really is very clever marketing schlock because it is such an appealing improvement to the consumers' consumption experience, but in fact it is entirely misleading: it can do nothing to in fact improve the “fairness”, and any increase in consumer price really can only accrue to the “fair trade organization” itself.
  • Sweat Shop Labor – Nobody likes sweat shop labor; we would all agree that a third-world worker working 16 hour days under dismal conditions and insignificant pay is a tragic. However, perhaps it is the best available alternative for that person? Maybe the next best alternative is to be unemployed? If so, rather than punishing the employer and eliminating the employee’s current best alternative, a better approach would be to provide an even better alternative, such as providing a means to increase the value of their skill set, such as building a local school. And, as an extension, how much good does boycotting sweat-shop goods really do? It only eliminates those poor souls’ best alternative, with an end result of making their lives worse…
  • Gambling – Why do people voluntarily engage in what every rational person knows to be a losing proposition? After all, a gambler can expect to get back, in winnings, only a fraction of what he gambles, yet he still voluntarily places that bet. Perhaps it is because the gambler is doesn’t understand the game and therefore doesn’t really understand what he can expect to win; this is a misperception about his perceived benefits from the transaction. (It also suggests why gambling houses do not have a vested interest in having their gamblers understand the gamble well.) There is another interesting phenomenon, as well, which is that often people like risk and will pay for it. Gamblers are willing to pay for the experience of a gamble; that enjoyment is a benefit to them.
  • Smoking – The perceived benefit – pleasure, taste, or some other aspect of the experience of smoking - must be quite great to offset the tremendous long-term health impact and high likelihood of becoming addicted. Or, perhaps, the potential smoker does not accurate perceive of the costs of smoking. Of course, we can all see why tobacco companies market to the young: since the part of the human brain that evaluates risks is not fully developed until a person reaches their late 20’s, the potential smoker doesn’t and possibly can’t correctly weigh the perceived costs of this habit. By the time a person can accurately weigh the benefits and risks, they’re often addicted, and can no longer make a voluntary decision to light up. “Get’em while they’re young”…
There are of course countless other examples, and I would appreciate any interesting examples being posted in the comments below.

There is ample room for interesting discussion of the difference between actual benefits and perceived benefits. For instance, there is arguably a government role in protecting minors or incompetents when actual benefits deviate from perceived benefits. Or, how much should an individual, or in a larger sense society, spend on educating themselves on actual vs. perceived benefits? Should everybody get a PhD in economics before they can be assumed to be competent to responsibly undertake a transaction (by themselves, by their counterparty, or by the government)? Perhaps these topics will be the subject of future ruminations…

No comments: