Sun, 22 Aug 2004

Value and Transactions

I received email from a reader, asking me to resolve a dispute between her and a friend:

I think that they are having trouble resolving this question because it's a wrong question ("Ask the wrong question, you'll get a wrong answer.") It can be answered trivially, so let me propose a better question, and then answer that.

By definition, every transaction in a free market economy is a win-win transaction. Both parties see more value in what the other party has than in what they have, so they trade. In any other circumstance, one or both value their current circumstances better, and refuse to trade. The only kind of trade you can have in a free market economy which leaves one of the parties immediately worse off is when they are forced to trade against their will.

Leaning heavily on Ludwig von Mises' tome Human Action, remember that the future is uncertain. People's opinions about the future differ. People take actions based on those opinions. All actions involve an element of risk. It's simply not possible in this world for all actions to succeed. Some will pan out, some will come up dry (very deliberately choosing to use those two cliches).

Every transaction is undertaken because the individual perceives a benefit at the time. Therefore, her question is trivially answered "every transaction in a free market (capitalist) economy already is a win-win transaction." I don't think she'll be satisfied with that answer, however, because I don't think the question is right. I think a better question, following from the dispute between her and her friend, is "Does the proper operation of capitalism rely on some people making mistakes?"

The answer to that question is "No". It's more a matter of mistakes being inevitable, and capitalism surviving them. If people didn't make mistakes, then capitalism would work much better ... but then again, so would socialism. Capitalism has a lot of flaws, whereas socialism is perfect in its design and has no flaws. The trouble is that imperfect people have to carry out both systems. Capitalism trades off the constant presence of small mistakes and thereby avoids the big mistakes that a socialist economy will make.

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