Trade

Trade is the voluntary interpersonal exchange of goods.

Trade and Production

The fundamental law of production is that joint production yields a greater return than isolated production. Two individuals working in isolation from one another produce less physical goods and services than if they coordinated their efforts. This is probably the most momentous fact of social life. David Ricardo first formulated this law as a law of comparative cost within the context of the theory of foreign trade. Later economists such as Pareto, Edgeworth, Seligman, and Mises argued that it was in fact a general law of exchange. Mises coined the expression “law of association.” Even if there were no other reasons for human beings to cooperate, the greater productivity of joint efforts, compared to isolated production, tends to draw them together.

See also: Production

Direct Exchange

Direct exchange is also called barter.

Jones can trade his apple against two eggs from Brown. In such a world, the volume of exchanges—in other words, the extent of social cooperation—is limited through technological constraints and through the problem of the double coincidence of wants. Barter exchanges take place only if each trading partner has a direct personal need for the good he receives in the exchange. But even in those cases in which the double coincidence of wants is given, the goods are often too bulky and cannot be subdivided to accommodate them to the needs. Imagine a carpenter trying to buy ten pounds of flour with a chair. The chair is far more valuable than the flour, so how can an exchange be arranged? Cutting the chair into, say, twenty pieces would not provide him with objects that are worth just one twentieth of the value of a chair; rather such a "division" of the chair would destroy its entire value. The exchange would therefore not take place.

Indirect Exchange

If a person desires a good with the intention to trade it away to someone else, then he is engaged in 'indirect exchange.

With the possibility of indirect exchange, goods are valued not only by their direct use-value but also their exchange-value. An actor will always value a unit of a good at the higher of these two. (For example, even a non-smoker can prefer a box of cigars over a hot dog, if he thinks he can trade the former to a smoker.)

See also: Money

See also: Price

The Benefits of Trade

In a voluntary exchange is the valuation of goods different and reverse: each party values what is given up less than what is received in the exchange. Because individuals value goods differently, there are mutual "gains from trade". Both parties benefit from a voluntary exchange (or at least expect to).

Trade also fosters specialization and the division of labor. By specializing in activities in which they are relatively most productive (or have the comparative advantage), actors greatly increase the productivity of their labor and enjoy more consumption goods than would be possible without trade.

Free trade

A voluntary action—free exchange leads to the mutual ben­efit of both parties to the exchange. Indirectly, the network of these free exchanges in so­ciety — known as the "free market" — creates a delicate mechanism of harmony, adjustment, and precision in allocating productive resources, deciding upon prices, and gently but swiftly guiding the economic system toward the great­est possible satisfaction of the desires of all the consumers. In short, not only does the free market directly benefit all parties and leave them free and uncoerced; it also creates a mighty and efficient instrument of social order.

On the other hand, coercion has diametrically opposite fea­tures. Not only does coerced exchange mean that some live at the expense of others, but, indirectly, coercion leads only to further problems: it is inefficient and chaotic, it cripples production, and it leads to cumulative and unforeseen difficulties. Seemingly orderly, coercion is not only exploitative; it is also profoundly disorderly.