Economics For The Citizen - Part II
by Walter E. Williams
There are four classes of behavior that can be called economic behavior. They are: production, consumption, exchange and specialization. Production is any behavior that creates utility, that is, raises the want satisfying capacity of something. When a mill smelts iron ore, it raises the want satisfying capacity of the material by changing its form. The metal’s want satisfying capacity is raised further when it’s made into steel and the steel into rails, girders and the like.
Production also includes changing the spatial characteristics of a good. Navel oranges have no want satisfying capacity for Philadelphians, if the oranges are in California. The person sometimes called the middleman or wholesaler changes the spatial characteristics of the oranges by moving them from California to Philadelphia thereby raising their want satisfying capacity to Philadelphians.
Consumption is easy. Consumption is simply the reduction of utility, the want satisfying capacity of something. When I eat a hamburger, I reduce its want satisfying capacity. When I drive my car, I reduce its capacity to satisfy wants. By the way, if production is greater than consumption the result is called saving. If it’s the opposite, we call it dissaving.
Exchange is a bit more complicated; misunderstanding it leads to considerable confusion and mischief. The essence of exchange is the transfer of property rights. Here’s the essence of what happens when I buy a gallon of milk from my grocer. I tell him that I hold property rights to these three dollars and he holds property rights to the gallon of milk. Then I offer: if you transfer your property rights to that gallon of milk, I will transfer my property rights to these three dollars.
Whenever there’s voluntary exchange the only clear conclusion that a third party can reach is that both parties, in their opinion, not yours or mine, perceived themselves as better off as a result of the exchange; otherwise, they wouldn’t have exchanged. I was free to keep my three dollars and the grocer was free to keep his milk.
If you think it’s obvious that both parties benefit from voluntary exchange,
then why do we hear pronouncements such as worker
exploitation? Say you offer me a wage of $2 an hour. I’m free to either
accept or reject your offer. So what can be concluded if I’m seen working
for you at $2 an hour? One clear conclusion is that I must have seen myself
as being better off by taking your offer than my next best alternative. I must
have perceived that all other alternatives were less valuable or else why would
I have accepted the $2 offer? How appropriate is it to say that you’re
exploiting me when you’ve given me my best offer? Rather than using the
term exploitation, you might say you wish I had more desirable alternatives.
While people might characterize $2 an hour as exploitation, they wouldn’t say the same about $50 an hour. Therefore, for the most part, when people use the term exploitation in reference to voluntary exchange, they simply disagree with the price. If we equate price disagreement with exploitation, then exploitation is rife. For example, I not only disagree with my salary, I also disagree with the prices of Gulfstream private jets.
By no means do I suggest that one purge his vocabulary of the term exploitation. It’s an emotionally valuable term to use to trick others but in the process of tricking others one need not trick himself. I’m reminded of charges of exploitation Mrs. Williams used to make early on in our 45-year marriage. She’d charge, “Walter, you’re using me!” I’d respond by saying, “Honey, sure I’m using you. If I had no use for you, I wouldn’t have married you in the first place.” How many of us would marry a person for whom we had no use? As a matter of fact, the problem of the lonely hearts among us is that they can’t find someone to use them.
Specialization is said to occur when people produce more of a commodity than they consume or plan to consume. Specialization can occur on an individual, regional or national basis. Here are examples of each.
Detroit assembly line workers produce more crankshafts than they consume or plan to consume. Californian citrus growers produce more navel oranges than they consume or plan to consume. Brazilian coffee growers produce more coffee than they consume or plan to consume.
There are two requirements for specialization. There must be an unequal endowment of resources and trade opportunities. The unequal endowment part means that an individual has the skills, a region or nation has a resource endowment of land, labor, capital and entrepreneurial talent whereby it can produce certain things more cheaply than can another individual, region or nation. For example, while it’s possible to grow wheat and corn in Japan, it would be an expensive proposition. Why?
Because crops like wheat and corn use a lot of land and Japan is relatively land poor. That means Japanese land is relatively expensive. By contrast the U.S. is land rich hence grain production is relatively cheap. Therefore, it makes sense for the U.S. to take advantage of what it can do more cheaply - specialize in grain production and Japan specialize in what it might produce more cheaply - say camera lenses.
In order for specialization to occur there must be trade opportunities. It wouldn’t make sense for U.S. farmers to produce more grain than they consume or plan to consume if they couldn’t trade it. Neither would it make sense for Japanese producers to produce more camera lenses than they consume or plan to consume if they couldn’t trade. That’s why trade opportunities are necessary in order for people to take advantage of wealth-enhancing specialization.
Imagine that the Japanese government imposed trade restrictions on U.S. grain imports. Japanese farmers could charge monopoly prices and enjoy higher income and Japanese consumers would pay higher prices. Would you deem it an intelligent response for the U.S. government to retaliate against Japan’s trade restrictions by imposing trade restrictions on Japanese camera lenses allowing American lens producers to charge monopoly prices and American consumers suffer higher prices? Put another way, is it a smart response for the U.S. government to harm American consumers because Japan harmed its consumers?
Specialization and trade make people dependent upon one another for their everyday
wants. How many of us make our own eyeglasses, cars, houses, clothing and food?
We get all those goods by specializing in what we do well, get paid, and trade
with others for what they do well. Through specialization and trade, we might
call it “outsourcing”, we enjoy goods as if we actually produced
them. In fact, specialization is an alternative method of production. By the
way, anyone calling for independence individually, regionally or nationally
is asking us to be poorer. It makes no difference whether they’re calling
for energy
independence, clothing independence or coffee independence.
Let’s look at just a few misleading statements about international trade.
The U.S. trades with Japan. Does anyone really think that it is the U.S. Congress
that trades with their counterparts in the Japanese Diet? It’s really
individual Americans trading with individual Japanese through intermediaries.
What about fair trade? If you purchase a Japanese-made camera lens on voluntary
and mutually agreeable terms, you’d probably conclude that it was a fair
trade or else you would have kept your money. An American camera lens producer
might call that trade unfair because he couldn’t sell you his lens at
a higher price. Economic
theory can’t answer a subjective question like whether it would be fairer
if you had to pay a higher price; it can say that a higher price would result
your having fewer dollars for other things.
The next installment of this series will focus on one of the most important economic concepts - costs.
Walter E. Williams
Fee-Ideas on Liberty #28
September 2005
Return to Ideas on Liberty Page