"When it becomes dominated by a collectivist creed, democracy will inevitably destroy itself." ~ Friedrich August von Hayek
World Economics: The Most Simple of Calculations
Exclusive to STR
March 2, 2009
There's a phrase for something which most people believe, even if they've never consciously considered it: "zero sum game," and it refers to the idea that in life, just as in the game "Monopoly," one can only gain stuff (hotels, railroads, dinner, sex) by getting that stuff from (or before) some other player, as there is only a given amount of stuff to go around. Somehow or other this appears to be an obvious truth, so obvious that one would have to be an idiot to even question it. But, if you will, let me throw out some pictures for your enjoyment.
First we might look at the "Garden of Eden," which even if it did not exist, will still provide an excellent example. Here you have a man and a woman and some serpents and apple trees and probably flowers (it is a garden, after all!) and streams, hills, valleys, meadows, clouds and sunshine. Regardless of the specific details, I imagine that anyone will agree that on some level or another, that early existence on this planet was much simpler than it is now, and that the picture we've seen is likely near enough to that reality for the sake of argument. Okay?
Now let's consider Hong Kong . (Whew! That was a rush, wasn't it?) And Omaha . Prague . And so on. What diversity! Let me ask you . . . if life is a zero sum game, if all of the stuff that's here has always existed and is just being rearranged by trading amongst the players, where was all of this stuff when Adam and Eve were frolicking in connubial bliss (lucky them)?
Oh, it was all here, you may say, but it was just in different forms then. The cars were still minerals in the rocks and sap in the tire trees, and the computers were in dinosaur-juice pools deep in the earth. It was all there, don't you see? . . . Well, yes I do. But let me ask you--how well do you think Eve was able to blog with her friends with all of those computer molecules stuck in that black ooze?
You know the line about beauty, how it's in the eye of the beholder? Well the exact same truth pertains to wealth. To the Canadian having a mid-winter escape party with Hawaiian shirts and ukulele music, spiced up with pi'a coladas, a coconut is an extravagant party favor. To the South Sea islander napping beneath his tall fronded tree, it's just another god damned coconut. He might even pay you to get rid of them so they don't fall on his head.
That pool of bubbling crude which was such a mess for early farmers to deal with when it oozed up on their property is something altogether different to someone who has a factory capable of making polystyrene out of it. With polystyrene you can make Styrofoam coolers and keep your food from spoiling for days, long enough to transport it to places where the natives have never even seen an oyster before. So you are dealing with the same molecules from the same dead dinosaurs (or mineral processes or whatever) but you have now put them together in combinations which never existed before and put them to new uses for which no one even knew they wanted them until they'd had their first inland oyster feast.
What does "wealth" mean? Wealth is not stuff for the sake of stuff. Just ask the South Sea islander who's just been beaned by a falling coconut. No, wealth is having stuff that makes your life better. Igloo coolers, beer, being able to comment on your friend's blog with your computer, feeding your children healthy, fresh fruits in the middle of the winter in a snug and warm home. This is wealth. Wealth is not money. Wealth is the ability to have the things which make your life better, whether that is medicine (and her favorite doll) for your sick child, or a cigar and a good hooker. And the thing that is so important to recognize is that, just like beauty, it is in the eye of the beholder. If your beloved is sick, or sad, or hungry, no amount of cigars and hookers will equal wealth to you, even if they are bathing in one of Trump's penthouse hot tubs. Of course your daughter's latest must-have-doll is of no value or interest to the young type-A male who's just made the biggest deal of his life and is looking to celebrate. No value whatsoever.
Adam. Remember Adam? (It's a song about Adam!) Can you see that this world, made from the same molecules and atoms as Adam walked around in, is much wealthier today than it has ever been? And no, I'm not ignoring the environmental problems and other harms that exist, but really, could Adam's world have supported even a small portion of the current world population? Even forgetting about flush toilets and refrigerators. There isn't any way, wouldn't you agree? Wealth is not a fixed thing.
Do you see what I mean now when I say that wealth is not a zero sum game? We humans create wealth (and we can destroy it). Some animals do as well, of course, but in nowhere near the scale of the human animal. Birds build nests, beavers build dams, and so on. We build farms and windmills, solar panels and fine restaurants. (Don't forget the hot tubs and cigars!) And the key to all of this wealth is trading with others to get what you want while at the same time giving them what they want.
It is in this way, the idea that both sides of a voluntary transaction come away richer for having made the trade, that the wealth of the world has grown from a few apple trees to Hong Kong and pristine nature preserves, punk rock and ballet. The same amount of atoms and molecules exist as before, but what makes more wealth is the fact that more people have more of the things that they want, that they value. (Personally, I can do without more opera. But that's just me.)
In case I've not filled in all the sky in this painting I have on the easel, think about how voluntary trade can make both the coconut farmer and the Silicon Valley entrepreneur wealthier at the same time. Each trades what he values less for what he values more, and each comes away better off for having made the trade than beforehand. And in its own small measure, that single trade has made the world a small bit wealthier as well.
The key element that makes this all work it this: it must be voluntary trade. Somehow many people seem unclear on this point and they try to make decisions for others, attempting to force the world to be better off than it is now--through taxes or other forms of directed interactions--but stop for a moment and look at this. Voluntary means just that. It doesn't mean you have to do this or I'll shoot you. Or, "You have to do this or else, but it's your choice, ha ha ha!" Nope. Voluntary means that it is something that you freely choose to do out of your own desires.
Now, as to why this is important in creating wealth, look at it this way: If you and I each trade things we have for things other people have, like let's say I trade you a good orange and you trade me a good orange. Well, has either of us gained in the transaction? No. In fact, because we each wasted a bit of our time and energy in the process of trading our oranges with each other (economists call these things "transaction costs"), we've actually both been made a tiny bit poorer by coming out 'the same' on the trade. So it is not trade that makes us wealthier, it is free trade. It seems to me that no one would willingly, voluntarily, go to all of the expense of making a trade in which he did not gain in some way. So, sort of by definition, any voluntary trade is one which benefits the person trading.
What is the magic here? It's quite simple when you look at it. Only when a trade is voluntary--free--on both sides, will the net wealth of both parties, and the world as a whole, be larger as a result. If either one of us is not going to be better off by making the trade, then that one is not going to make the trade. It's that simple. No one else but you yourself can say at any given moment what it is that you value the most highly. For me it may be having my historic district reflect the charm of a day I dream of in which the world was a better place, and so I'm willing to put some of my labor or money to work on landscaping the park or my street. But for you, perhaps your son or wife has a serious disease and regardless of your love of the neighborhood and even your respect for what I'm trying to build, regardless of these things, your medical expenses trump all other concerns at present. Can you see how, no matter how well intentioned an historic-district tax or regulation might be, there is no way it can increase the wealth of the individuals involved or the world as a whole? For if I wanted to put my money to the same use as the people who passed the tax, I will do that anyway, and we'll all be better off for it. The simple fact that I am being taxed to do something means that there is something else that I value more at that moment. Your taxing me will end up at the very least decreasing my wealth by the amount of the tax (something I value less), rather than spending that money on my wife (or whatever I may value more). I say "at the very least," for it is highly likely that we'll both be worse off, for your world will be poorer as a whole, even if you specifically are better off in the moment. Why? I will be more resentful of the money spent, for one thing, and an unhappy camper is not a productive member of society. Over time each depletion of wealth makes the world a poorer place for all of us, so that even though there may still be rich and poor (and you may be one of the rich), those rich will be wealthy only in comparison with the poor, but not in comparison with how wealthy they could have been if the general wealth of the world had been allowed to grow as fast as it might--each person being able to choose, trade by trade, day by day, the best choice for him and his family and loved ones (even if they're hookers).
The point that I'm trying to describe is that any choice that is not a free choice makes all of us a bit poorer in the end. There are no excuses and no exceptions, for no one can know what is most important to a person better than that person himself. If you force me to do something against my will, you have made me worse off. Can there be any doubt of this? The point of all of this is that simple economics reveals that government destroys wealth rather than creating it. It can be no other way. It is only through voluntary trade that both parties come out better off than they were before. Anything else is either a wash or a net loss. So anytime you hear someone say that this law or that law, this tax or another, one regulation or a whole book of them, will make the world a better place, just remember this: if it were going to improve the lives of all concerned, they would not have to be forced into doing it, they would already have done it by now! To govern means to control. And we can see now that to control means to make worse off, to force one to make a choice one would otherwise not have made. There is no excuse whatsoever for the use of force to achieve a better world. None. It just does not add up.
It is through asking one simple question that we can answer whether or not something is the best way to move forward in our lives: Is it voluntary? (If not, it's a reduction in wealth. I don't care what fancy claims someone may make.)
World Economics: The Most Simple of Calculations