Economic Harmonies: Chapter Four Review – The Expediency of Exchange

The Expediency of Exchange, Its Evolution, Efforts Behind Facilitating and Extending It, and The Wall of Popular Restrictions That It Is Up Against, Then and Now

By Scott Albright

The evolution of exchange, of voluntary trade, has advanced so far beyond the depths of what we can imagine and we take it for granted all too often. When you see clearly how an increased population allows for a larger and more dynamic workforce, and that advances in science and technological innovations in capital investments that can perform more complex services and utilities emerge in the market, the range of your ability to exchange is immeasurable, providing that exchange is voluntary. As Bastiat so concisely put it, “the capital savings due to exchange surpass one’s imagination.”[1]

Ultimately, the effects of an extended division of labor with in sourced labor or outsourced production are essentially the same as capital investment/machinery used in production in that they all free up labor to be available for newer wants, talents to fulfill desires of goods and services of a higher order. This was first discussed in chapter two of the Harmonies but the quotes most noteworthy in chapter four, summing up it’s main principles and thesis are:

“In the state of isolation, our wants exceed our productive capacities.  In society, our productive capacities exceed our wants.”[2]

“There are two great incontrovertible truths. The first is: The better man exploits the forces of Nature, the better he provides himself with all that he needs. …

…The second truth is: The resources of Nature are unequally distributed over the earth.”[3]

What is so plain and clear at the individual level is often so heavily disputed at the larger and national level. When we think of how hardly no individual household attempts to produce all that they consume and that this would be too impoverishing to try, the plain as day in every way of life’s details show us the basics of economic principles that make textbook econ look like featherbedding to protect salaries of the tenured at our universities today!

When Marco Rubio campaigned for president last year, he advocated a continuation of import quotas on sugar so that a relatively few number of U.S. farmers would be protected from international competition. This is the typical status quo of most politicians but why not better exploit the forces of nature to render the benefits more accessible to all. We don’t produce “ice at the equator and sugar at the poles” (p.70) so to speak, and although that would be an extreme case of economic isolationist production or definitely not exploiting the forces of nature with sensible applications of our faculties where they are more conducive to richer results, what Rubio and others are proposing with these import quotas do restrict our ability to consume, on better terms, produce that grows more abundantly in climates more favorable to their gratuitous flourishing.

It’s a very lopsided argument without any logical consistency.

What I like to call intellectual welfare or welfare that all of society shares in the benefits of due to the creative brains/intellect of our pioneers and innovators in tech, industry, engineering, and vast array of health care innovators (as well as in other lines of work) is the only legitimate form of welfare because it doesn’t come about via coercion, but rather voluntary exchange and an enabling of its expansion. It is born about because we have the property rights and market freedom to ceaselessly apply our faculties to better our lot in life (for so many beyond the inventors themselves) and exploit the natural resources and forces of nature to make our labor more prosperous and beneficial to an ever widening circle of people. In this regard we all benefit so heavily from and live off of the benefits produced by these few (relatively speaking) giants.

“Our knowledge,” says M. de Tracy “is our most precious possession, since it is knowledge, in proportion to its soundness and breadth, which guides our efforts and makes them productive. Now, no man is in a position to see everything, and it is much easier to learn than to invent. But when several men are in communication, what one observes is soon known by all, and only one of them needs to be especially ingenious for all of them soon to be in possession of valuable discoveries. The sum total of knowledge, therefore, grows much more rapidly than in the state of isolation, not to mention that it can be preserved and, therefore, passed on from generation to generation.”[4]

Bastiat reveals the nature and effects of subjective value very well in this chapter. We highlighted that briefly in earlier chapter reviews, namely for chapters two and three but it is explained more clearly in chapter four and we certainly don’t disagree that the nature of exchange in and of itself reveals that we are seeking to obtain a good or service on better terms than we can realize for ourselves in direct production.

“It is simply that, when one man says to another, “You do only this, and I will do only that, and we’ll share,” there is better employment of labor, talents, natural resources, capital, and consequently, there is more to share.”[5]

Frédéric Bastiat

“It is at this point, therefore, that political economy really begins, for it is here that we can first observe the appearance of value. Barter occurs only after an agreement, a discussion. Each of the contracting parties makes his decision after considering his self-interest. Each one calculates in this fashion: “I shall barter if the trade brings me the satisfaction of my want with less effort on my part.”[6]

How exchange is amplified and expedited with money, mediums of exchange, is touched on in chapter four as well. When society advances from isolationist/direct production to direct exchange or barter, there is still a limit of exchange because of what economists term the “double coincidence of wants.” In short, this is when we can only exchange with another who has what we want and wants what we have. An example would be a coat maker who desires chicken eggs. The only way that he/she can realize a gain from exchange is if they find a chicken farmer who desires a new coat. That places a very strict constraint on the ability to exchange. Bastiat is definitely describing the effects of eliminating the double-coincidence of wants very eloquently, without even using the term! Indirect exchange via money is what eliminates this double coincidence of wants as well as enabling economic calculation, since we can compare the value of goods with one another better with a medium of exchange.

“Now, at the outset of our study of political economy, we must notice that the exchange that is transacted through an immediate commodity loses nothing of the nature, essence, or character of barter; it is simply a form of indirect barter. As Jean Baptiste Say very wisely and profoundly observed, it is better with two factors added, one called sale, the other purchase, which together are indispensable to complete a barter transaction. …

…In this way (because of money) the ultimate transactions are carried on across time and space between persons unknown to one another, and no one knows, at least in most instances, by whose effort his wants will be satisfied, or to whose wants his own efforts will bring satisfaction. Exchange, through the intermediary of money, breaks down into countless acts of barter between parties unacquainted with each other.”[7]

Bastiat describes the evolution of exchange in what could be envisioned on a sort of timeline, if you will, from isolated production to direct exchange/barter to indirect barter (via mediums of exchange) to other transactions extended over time and space by credit… “In logical order, … an amazingly intricate piece of machinery.”[8] We will touch on credit in later chapter reviews.

In order to expedite exchange, it is obvious that an infrastructure of roads, tunnels, ports, canals, airports, trade routes in general, and anything that eases the flow of people and goods must be developed to enable your growth and prosperity. The natural resources, efforts and energies devoted to these feats can’t be appreciated enough, because we now have the advanced methods of production and capital machinery to upkeep these necessities far more efficiently and safely but in the early days of getting them up and off the ground, so to speak, we didn’t have the same efficient methods and it was much more backbreaking work necessitating considerably more labor. This meant that more diversions of labor at more risk for injury were necessary than what would be now and it keeps things in perspective. Bastiat elucidated upon this cause, in order to bring people closer together to extend and expedite exchange.

“But exchange too encounters obstacles and demands effort. Proof of this is to be found in the great mass of human labor that exchange brings into play. Precious metals, roads, canals, railways, coaches, ships-all these things absorb a considerable part of human activity. And just think of how many men are employed solely in expediting acts of exchange, how many bankers, businessmen, shopkeepers, brokers, coachmen, sailors! This vast and costly assemblage of men and things proves better than any argument the tremendous power in the faculty of exchange; otherwise, why would humanity have consented to burden itself with it?

Since it is in the nature of exchange both to save effort and to demand effort, it is easy to understand what its natural limitations are. By virtue of that force within man that always impels him to choose the lesser of two evils, exchange will expand indefinitely as long as the effort it requires is less than the effort it saves. And it will halt, naturally, when, in the aggregate, the sum total of satisfactions obtained by the division of labor reaches the point where it is less, by reason of the difficulties of exchange, than the satisfactions that could be procured by direct, individual action.”[9]

…”The improvement of the commercial machinery, therefore, is equivalent to moving the two towns closer together. Hence, it follows that bringing men closer together is equivalent to improving the machinery of exchange. And this is very important, for it is the solution of the problem of population; here in this great problem is the element that Malthus has neglected. Where Malthus saw discord, this element will enable us to see harmony.

By means of exchange, men attain the same satisfaction with less effort, because the mutual services they render one another yield them a larger proportion of gratuitous utility.

Therefore, the fewer obstacles an exchange encounters, the less effort it requires, the more readily men exchange.

And the closer men are together, the fewer the obstacles, the smaller the effort. A greater density of population is, therefore, necessarily accompanied by a greater proportion of gratuitous utility. It transmits greater power to the machinery of exchange; it makes available a greater part of human effort; it is a source of progress.”[10]

This harmony in population will be discussed in more detail in the upcoming chapter 16 review concerning Malthus and his fear of overpopulation. But even here, it can be illustrated clearly in the same principle of having more people in closer proximity to better facilitate exchange. However, what must be remembered here, is that one fault of the classical economists is that they often assumed that man sought after solely monetary and economic gains in so far as consumer wealth and ability to continually obtain goods and services on better terms is concerned.

While I am not accusing Bastiat of that here, it is important to note that not all people desire solely monetary gains. Many people today still cling to parts of the labor theory of value, have protectionist or mercantilist leanings in so far as espousing and/or acquiescing into the idea that outsourcing of production, trade deficits, and heavier flows of in sourced labor are inherently bad for domestic producers and employees.

Once you consider the scope of advancement in economies and globalization, of prices of inputs such as raw materials, capital goods, intermediary goods, and final consumer goods and labor, taking on a more global nature and giving investors more opportunity to offshore their capital, in source some labor, this extent of liberty applied to free trade and movement of people is still met with alarm for many. Many techno phobic tech heads (if I can coin a term) today are even advocating for UBI, or a universal basic income, to supplement a mass of workers who they believe will be automated out of work permanently due to nanotechnology and A.I.

While I believe there will undoubtedly be sharp dislocations and reallocations of labor, I do not believe the extent of effects that the alarmists are warning of are well thought out. They are ignoring the fact, as Bastiat elaborated on in chapters two and three, that man’s wants are not static, but progressive. This must not be lost sight of because if it is, then people can assume all too easily that we will “run out of things to do and be idle.” That benefits of cheaper goods and services, the freeing up of labor to pursue newer talents for newer goods and services will meet a wall with A.I. is to be determined but I have my hope for liberty, for the creative destruction and the ingenuity of mankind. Don’t forget that people had the same fears from the tractor, automobile, and many other forms of machinery.

Either way, we can explain to some people these benefits of free exchange with great logic, points and data until we are blue in the face, but if they were a “victim” of free trade, automation, or downward pressure on wages due to migrant workers willing to work for less or a competing product in another market outside the U.S., it is much more difficult getting this to resonate with them. The offsetting benefits aside, as I’ve already explained, at the individual level, no one disputes the benefits of exchange, at the national level, it has been, is and will always be heavily debated. I know the logical inconsistency is still absurd, although that is just my opinion. So long as exchange is voluntary and not forced and/or restricted, I believe it’s benefits will always outweigh it’s costs, especially since voluntary exchange implies a subjective valuation of an end that one can obtain on better terms than what he/she could produce themselves, although this does not mean that after the fact, we can’t come to the conclusion that we’ve made a poor choice.

The restrictions and limits on exchange were a big issue in Bastiat’s day as well. The revelations from him concerning the class tensions between the working class and wealthier land owners and capitalists of the day during the February Revolution of 1848 are still present today, 170 years later in the U.S. and much of the world. That contagion of legal plunder that he so eloquently warned about in The Law and here as well, is prescient and should always be heeded. That, when the privileged classes can obtain it, instead of an outcry against all privileges, we see it spread pervasively so that there is more robbing of Peter to pay Paul, so to speak, until everyone succumbs to it, not necessarily in principle but even consequentially only as a means to hopefully offset some of what was plundered. I call this the pocket picking circle. Eventually everyone wants their hand in someone else’s pocket and no one wants to pull it out. We can only imagine how frustrating it must have been to be able to so eloquently describe and spread these ideas, these benefits of liberty, economic freedom and exchange, and his country only wind up embracing more legal plunder. In light of what is happening with the “Skinny Repeal” of the “Affordable Care Act” in 2017 here in the U.S., I feel the same pain.

“Take from some to give to others! Permit me to point out the danger and the absurdity of the economic thinking in this so-called social aspiration, which welled up in the hearts of the masses and finally burst forth so violently during the February Revolution.

When there are a number of strata in society, it is understandable that the uppermost one should enjoy privileges at the expense of the others. This is hateful, but it is not illogical.

Then the second stratum from the top will not fail to batter down these privileges; and, with the help of the masses, will sooner or later stage a revolution. In that case, as power passes into its hands, we can understand that it too creates privileges for itself. This is always detestable, but it is not illogical; at least it is not unfeasible, for privilege is possible so long as it has the great mass of the people under it to support it. If the third and the fourth strata also stage their revolutions, they too will arrange, if they can, to exploit the masses of the people, downtrodden, oppressed, exhausted, stage their revolution too. Why? What do they propose to do? You think perhaps they are going to abolish all privilege, inaugurate the reign of universal justice? Do you think that they are going to say: “An end to restrictions; an end to restraints; an end to monopoly; an end to government interference for the benefit of one class; an end to heavy taxation; an end to diplomatic and political intrigue”? No, their aim is very different. They become a pressure group; they too insist on becoming privileged. They, the masses of the people, imitating the upper classes, cry in their turn for privileges. They demand their right to employment, their right to credit, their right to education, their right to pensions. But at whose expense? That is a question they never stop to ask. They know only that being assured of employment, credit, education, security for their old age, would be very pleasant indeed, and no one would deny it. But is it possible? Alas, no, and at this point, I say, it is no longer detestable, but illogical to the highest degree.

Privileges for the masses! People of the lower classes, think of the vicious circle you are placing yourselves in.”[11]

“…And they do not see that by extending and systematizing more and more the axiom: Take from some to give to others, they are encouraging the error that creates the difficulties of the present and dangers for the future. …

…Even greater is the harm done by our university system, which fills all our heads with Roman prejudices, that is, with everything most incompatible with social truth.”[12]

Does anything really ever change? Bastiat ends the chapter with an enlightening point, and makes plausible one of the reasons why these logical consistencies exist. Like I said earlier about how contentious free exchange is at the national level but never is it contested at the individual level, the question of free exchange implying that some producers will inevitably go out of business with evolving economies, changing demands, and the same effect happening at the national level when certain investors move their capital abroad, does imply that because domestic output of product and employment of labor is under more competitive pressure with advancing economies worldwide, it is not surprising that those employed who may believe that they are at risk of being dislocated from work at least temporarily, and those that have capital outlays on the line and risk losing on investments as producers, would only naturally be inclined to favor of some protectionist measures, believing that it could not be harmful since it “keeps Americans employed or shielded against foreign competitors.”

“How happy will nations be when they see clearly how and why what we find false and what we find true of man in isolation continue to be false or true of man in society! …

…And, since the more keenly all those about us are aware of the obstacles that stand in their way, the more generously they are inclined to remunerate our efforts, it follows that we are all disposed, from this point of view, as producers, to dedicate ourselves almost religiously to exaggerating the importance of the obstacles that it is our business to combat. We consider ourselves richer if these obstacles are increased, and we immediately conclude that what is to our personal gain is for the general good.”[13]

This ending of chapter four is a timely fit for chapter five which is titled Value. In it will be discussed the nature of value, how it differs from utility, and where the classicals went wrong in conflating the two, inevitably giving fuel to the communists fire!

[1] Ibid, p.71

[2] Bastiat, Frederic. Economic Harmonies, p. 61, The Foundation for Economic Education, 1996.

[3] Ibid, p.69

[4] Ibid, pp.70-71.

[5] Ibid, p.71-72.

[6] Ibid, p. 72

[7] Ibid, p. 74-75

[8] Ibid, p. 76

[9] Ibid, pp.76-77

[10] Ibid, p.78

[11] Ibid, pp.90-91

[12] Ibid, p.93

[13] Ibid, pp.97-98

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